Ackman’s Allergan play: Not insider trading, not a problem for private equity

April 23, 2014, 8:35 PM UTC
Bill Ackman was happy to serve as a Trojan Horse for Valeant.

FORTUNE — Sometimes if it walks like a duck and talks like a duck, it’s actually a different animal. That seems to be the lesson from yesterday’s news that Valeant Pharmaceuticals (VRX) and activist investor Bill Ackman are partnering on a $50 billion takeover offer for Botox maker Allergan Inc. (AGN), after Ackman secretly acquired nearly a 10% stake in Allergan on Valeant’s behalf. The whole thing feels like a classic example of insider trading, except that it most likely isn’t.

As my colleague Stephen Gandel reported, Ackman didn’t originally have any grand plans to help acquire Allergan. He wanted a stake in Valeant. But when Ackman called company management in early February, he learned thatValeant was eager to acquire Allergan (it was rebuffed last year). So he helped come up with a strategy for getting the combination to work. In short, he would buy up shares of Allergan — albeit not enough to trigger any HSR disclosures with the Federal Trade Commission — and then pledge to vote those shares in favor of the eventual acquisition offer (plus make an additional investment).

Or, put more bluntly, Ackman traded on non-public material information.

The reason it apparently isn’t insider trading is twofold: First, there was no breach of fiduciary duty to the holder of the confidential information (Valeant). After all, Valeant was the one that volunteered its plans to Ackman, and encouraged him to trade on it. Second, Ackman disclosed the Valeant relationship via a 13D filing with the SEC, which is required after acquiring a 5% stake in a company – even though the current waiting period rules actually let him accumulate around a 9.7% stake by the time the 13D was actually filed.

In the past 24 hours I’ve heard some suggestions that this deal could become problematic for private equity, if corporations using activists as Trojan horses becomes commonplace. Here’s the argument: Strategics already have an advantage over private equity in that their cash is cheaper (even in today’s frothy credit environment). Now they’d have an additional advantage in competitive situations, by basically baking in a large shareholder voting on their behalf. At worst, the PE firm would pay a premium and the corporation/activist would receive a profitable return on their investment.

My gut take is that private equity is unlikely to feel any sting here. For starters, PE-sponsored take-privates have been losing popularity. This year in the U.S., for example, there only have been a small handful of deals valued at just $3.12 billion in aggregate, according to Pitchbook. And there have been fewer than 50 such transactions for the past five years (last year’s total dollar volume was $55 billion if you include Dell but remove Heinz).

Second, it’s hard to imagine that too many corporations are really going to want folks like Ackman within their henhouses. Third, we don’t even know if their strategy is going to work out for Valeant. Allergan has not yet formally responded, except to say that it’s examining the offer. 

Certainly something to watch, but not anything to keep PE pros up at night. 

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