Articles

The Father & His Two Daughters

fATHER

Reviewing today’s news, I am reminded of one of Aesop’s fables:

“A man had two daughters, one of whom married a farmer, the other a potter. After a while he paid a visit to the farmer, and asked his daughter how she was and if all was going well with her. ‘Splendidly,’ she replied, ‘I could wish for nothing more if only we had a little more rain for the crops.’ The same day, he went to the potter’s house, and asked his other daughter how things were faring at her new home. ‘Never better,’ she replied, ‘if only we had a little more fair weather to bake our clay.’ ‘Alack!’ said the father, ‘if you want shine and your sister rain, which am I to pray for on my own account?’”

– If all prayers were answered, no one would be satisfied

Yesterday Valeant, the Canadian pharmaceutical company, closed down more than 50% subjecting the company to its worst ever one-day drop. Valeant, which was valued at over $90bn in August of last year, was left with a market cap of just $12bn after yesterday’s capitulation.

On the surface, the reason for the fall seems quite simple – Valeant had poor first quarter results. The bad news included predicted future earnings for 2016 being re- adjusted to $5.7bn from the $7bn forecasted in December, the announcement of the the possible default of $30bn in debt, and the looming investigations by several US authorities. Valeant also made the strange and contradictory move of forecasting a brighter 12month forecast that omitted its disastrous first quarter and started the cycle from the second quarter.

However, the plot is a little more complicated. It has emerged that a chasm opened up between the company’s board and management concerning the best strategy with which to best showcase the health of the business to investors. This in turn ultimately lead to a lack of a coherent communications strategy needed to tackle the issues head on.

Looking at Valeant’s two biggest shareholders, Bill Ackman’s Pershing Square and Jeffrey Ubben’s ValueAct, it is easy to see why. Both are activist investors, both hold seats on the Valeant board, and both hold vastly different ideas on how best to manage a company. The result being a long-held rivalry, with Valeant being the latest battle ground.

On the one hand Pershing Square, represented by Stephen Fraidin, acknowledged that Valeant had suffered a poor first quarter but would inevitably rebound in the Spring. They therefore wished to issue a forecast that properly indicated this potential rebound. On the other hand, ValueAct, represented by Mason Morfit and Robert Hale, believed that overly demanding targets initially caused Valeant’s woes in the first place and urged for greater caution. In turn they believed more manageable targets that could easily be met should be set, thus bringing about a recovery in the coming months.

In this context it is easy to explain the inconsistency within yesterday’s announcement. In cutting forecasts for 2016, Valeant’s returning CEO, Michael Pearson, was pandering to ValueAct, and in projecting a 12 month forecast that omitted first quarter earnings and began with second quarter earnings, Pearson was pandering to pressure from Pershing. As a result, Pearson found himself in a position similar to that of Aesop’s farmer – a man willing to please both daughters, but ending up pleasing none.

Valeant has a long road ahead to repair the damage caused by the events of the 15th March 2016. Investors have clearly been spooked by the company’s distinct lack of strategy in how it manages itself and by the rift that is emerging within its boardroom. Activist investors can often provide the stimulus and motivation to propel a stagnant management into action. However, as with Valeant, they can also tie management’s hands behind their backs resulting in a lack of strategy, conviction and direction.

Michael Pearson and the Valeant management would do well to heed Aesop’s message and develop a focused, clear and coherent management strategy that rises above the Pershing/ValueAct rift. Until it does so it is hard to see a bright way forward for Valeant, because ultimately in trying to please all one often ends up pleasing none.

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