Advanced Medical (EYE) and Holder ValueAct Battle It Out on Bausch & Lomb (BOL) Bid
In an amended 13D filing after the close on Advanced Medical Optics (NYSE: EYE), the company's largest shareholder (14.7%), ValueAct Capital, disclosed a letter to the company opposing its bid for Bausch & Lomb Inc. (NYSE: BOL).
From ValueAct's Letter: "We believe an AMO acquisition of B&L would impair our expected risk-adjusted return as AMO shareholders. The proposed acquisition increases business risk by further concentrating AMO cash flows in a consumer contact lens and lens care business that is clearly prone to product recalls and that has a long- term demand profile that is much more questionable than that of AMO's surgical business. The required debt financing reduces the margin for error operationally and, together with the proposed issuance of collarless equity, subjects current shareholders to significant capital markets risk. Finally, the proposed transaction raises substantial regulatory risk which you have told us is the reason that you do not yet have a commitment from any private equity partners.
But most concerning to us is the execution risk of a B&L acquisition. Against the backdrop of the Complete MoisturePlus recall and the integration of IntraLase, you are asking investors to believe that Randy and you can deliver on the synergies of integrating B&L, a company that is over twice the size of AMO (based on 2006 revenue), in what would be your most complicated acquisition to date. By your own admission this would be a stretch and would challenge already constrained management resources. In your July 5th press release, you stated that you intend to rely not on a strong management bench but on "a team of outside advisors to complete a rapid and successful integration".
We might feel differently had you demonstrated an ability to deliver in the past, but a B&L acquisition in your hands is simply too big a leap of faith in light of your public track record."
In response to ValueAct, Advanced Medical Optics issued a letter saying they are "surprised and disappointed" by their opposition to the merger. The company said, "Your opposition to this transaction is especially hard to understand given your expressed interest on June 12th in investing $700 million in equity in a B&L acquisition and your reaffirmation of a desire to participate in financing the transaction as recently as July 5th."
A Copy of ValueAct's Letter:
Dear Jim: (CEO)
ValueAct Capital ("ValueAct") now owns 8.8 million shares representing 14.7%of Advanced Medical Optics' ("AMO") common shares outstanding. I am writing to express ValueAct's opposition to AMO's proposed acquisition of Bausch &Lomb ("B&L"). I have copied B&L's board of directors on this letter so that they might consider our objection in evaluating AMO's offer. We understand that the proposed acquisition would require AMO shareholder approval. We intend to vote against the deal.
We believe an AMO acquisition of B&L would impair our expected risk-adjusted return as AMO shareholders. The proposed acquisition increases business risk by further concentrating AMO cash flows in a consumer contact lens and lens care business that is clearly prone to product recalls and that has a long-term demand profile that is much more questionable than that of AMO's surgical business. The required debt financing reduces the margin for error operationally and, together with the proposed issuance of collarless equity,subjects current shareholders to significant capital markets risk. Finally,the proposed transaction raises substantial regulatory risk which you have told us is the reason that you do not yet have a commitment from any private equity partners.
But most concerning to us is the execution risk of a B&L acquisition.Against the backdrop of the Complete MoisturePlus recall and the integration of IntraLase, you are asking investors to believe that Randy and you can deliver on the synergies of integrating B&L, a company that is over twice the size of AMO (based on 2006 revenue), in what would be your most complicated acquisition to date. By your own admission this would be a stretch and would challenge already constrained management resources. In your July 5th press release, you stated that you intend to rely not on a strong management bench but on "a team of outside advisors?to complete a rapid and successful integration".
We might feel differently had you demonstrated an ability to deliver in the past, but a B&L acquisition in your hands is simply too big a leap of faith in light of your public track record. You have yet to stick to or deliver a single number to which you have initially guided investors for the years 2005to 2008. The following table lays out the history:
Pro Forma EPS
2005 2006 2007 2008
Previous guidance $1.65 - $1.75 $2.20 - $2.30 $2.65+ $2.25 - $2.40
Date issued October 21, 2004 February 8, 2005 July 20, 2005 January 8, 2007
Actual / most recent guidance $1.48 $1.30 ($1.15) - ($0.95) $1.55 - $1.75% change based on mid-point (12.9%) (42.2%) - (29.0%)
In October 2004, you guided investors to $1.65 to $1.75 of next year proforma EPS. Today, almost three years later, your next year guidance is$1.55 to $1.75 ? more or less the same target. Is it a surprise that AMO'sstock price is in the same spot? On a prospective basis you have held out the carrot of $2.25+ of pro forma EPS, a target which has perpetually been around the corner ? first in 2006, then pushed out to 2007, then pushed out to 2008, and now in 2009 at the earliest. Just as $2.25 of pro forma EPS have yet to materialize, real earnings have yet to materialize. From 2002 to2006, cumulative one-time costs1 of $595 million have more than entirely offset cumulative operating profit2 of $445 million. How long will one-time acquisition and repositioning costs obfuscate the earnings power of the business? At some point you must execute on what you have and deliver on the promise. When you have yet to deliver actual earnings, it is unrealistic to ask us to believe you can execute an acquisition of the magnitude of B&L.
Our initial investment decision was based on the strength of the AMO's existing assets, specifically the surgical assets. Favorable demographics support solid secular growth rates, which we believe will be augmented byless emphasis on reimbursement-based demand and more emphasis on consumer-driven demand. The industry structure is conducive to sustainable,attractive margins and is one where innovation will expand the market and move market share.
We have always believed in AMO's business. It's the lack of discipline on the part of management and the board that has been our greatest concern.Randy has made the argument that AMO would not be where it is today, that is,bidding on B&L, if not for the acquisition program to date. As we describe above, there has been no per share earnings or stock price progress over the last three years. Randy's comments further our point that management and the board appear misguided in thinking absolute growth, at any cost, will also grow shareholder value. We have seen all too often acquisition-oriented management teams go "a bridge too far". AMO's attempt to acquire B&L raises operational, financial and regulatory risk that will distract management fromwhat should be top priorities in the near term including fixing the existing lens solution challenges, driving market adoption of multi focal IOLs and realizing the promised synergies of the IntraLase acquisition.
With all AMO has on its plate, the timing of this proposed deal could not be worse. The process is rushed, and the contemplated financing, with all its uncertainty to current equity holders, poses unacceptable risk. We feel the impulse to do the B&L deal right now is indicative of a management and board fixated on doing a deal at any cost. The B&L proxy statement filed today indicates that in October 2006 you initially expressed an interest in possibly acquiring B&L for "in excess of $60 per share". Faced with potentially losing the deal to Warburg Pincus ("Warburg"), you eventually increased this to $75. In addition, your June 20th proposal to acquire B&L included the concept of a 5% equity collar. The B&L board had issues with the "lack of price protection with respect to the stock component" so you ceded collar protection in your June 29th proposal, thus trading significant risk of dilution to current shareholders in order to stay in the hunt.
To the extent that an AMO and B&L combination makes sense, this property is not going into Warburg's hands forever. To the contrary, Warburg is a seller at some point; that is how they get paid. Management should take the lower risk path of fixing the solutions business and integrating prior acquisitions while letting Warburg handle the heavy lifting of the B&L turnaround. We want you to prove to your shareholders that you deserve to do a deal this big, by first executing on the current challenges and opportunities. By doing so, you will reduce AMO's cost of equity. While the B&L asset will be more expensive next time around, the risk-reward will be more attractive.
Sincerely,
Jeffrey W. Ubben
Managing Partner
ValueAct Capital
G. Mason Morfit
Partner
ValueAct Capital
Advanced Medical Optics' Response Letter:
Dear Jeff and Mason:
We were surprised and disappointed by your July 10th letter regarding our proposed acquisition of Bausch & Lomb. Your opposition to this transaction is especially hard to understand given your expressed interest on June 12th in investing $700 million in equity in a B&L acquisition and your reaffirmation of a desire to participate in financing the transaction as recently as July 5th.
Based on our review over the last several months, we believe the proposed acquisition of B&L offers a unique and compelling value-creating opportunity for AMO and all of its stockholders. As we stated in our July 5th press release, this transaction, which we believe would be significantly accretive on a cash basis in year two, would:
- Significantly expand AMO’s global scale and scope. With sales in over 100 countries and operations in over 50, B&L’s global reach would greatly enhance AMO’s ability to expand market opportunities and margins.
- Broaden and deepen AMO’s product portfolio. B&L’s strengths are in contact lenses and lens care, eye drops for dry eye, allergies and inflammation, vitamins for ocular health, vitreoretinal surgical products and post-operative prescription products. Combining these with AMO’s eye care, cataract and refractive products and technologies would create a broad-based product offering for physicians and further AMO’s stated strategy of providing the complete refractive solution.
- Enhance AMO’s ability to generate efficiencies and innovation. The combined global platform would provide significant opportunities to enhance efficiencies and create productivity improvements. Economies of scale would allow both companies to build on their unique and complementary heritages of product leadership and innovation within ophthalmology through increased investment in R&D.
We have every confidence that we have the experience and bandwidth to successfully complete the transaction and integrate the two businesses to create a stronger, more competitive combined company with a platform for sustained, profitable growth.
Your letter makes numerous inaccurate and misleading statements about the proposed transaction that we feel compelled to address:
• We strongly disagree with your assertions about the long-term demand profile of the contact lens and lens care businesses. This market has attractive long-term growth rates and, as you well know, has always been a central part of our Complete Refractive Solution strategy.
• We question your analysis of the collarless equity component. To be clear, our June 29th proposal was for a fixed number of shares, which would be set at the time of the merger agreement. Including a collar could have increased the number of shares AMO would be required to issue, thereby diluting our stockholders’ interest.
• We take issue with your blatant mischaracterization of our conversation regarding potential commitments from private equity firms. While we may pursue private equity financing in the future, we do not have commitments at the current time only because we have not sought them – and not because of any perceived regulatory risk.
• Regarding your portrayal of the regulatory risk associated with the transaction, we stated in our July 5th release that we have conducted a thorough review of the potential antitrust issues and are confident that we will be able to address these issues in a timely manner.
• The global recall of Moisture Plus is well underway and our eye care team is now focused on relaunching another product by the end of the third quarter. The IntraLase integration is effectively done and has been a tremendous success.
• We have been clear that a team of advisors is working in conjunction with our management team. We have every confidence that we have the necessary time and resources to focus on implementing a successful transaction.
• Your characterizations of earnings and guidance updates without reference to the context in which they were made are grossly misleading. The one-time charges you referenced were for acquisitions and repositioning efforts made in the latter half of the five-year period for which most of the accretion and value will be generated in future years. In the five years since AMO became an independent company, we have increased our enterprise value from $410 million to approximately $3.8 billion. This is strong evidence of our ability to create value.
We have been encouraged by the market reaction to our July 5th announcement and the positive feedback we have received from many stockholders on the strategic rationale and value-creation potential of the transaction.
We were very surprised by your unprovoked public attack. The content and tone of your letter are particularly disturbing because we have been open and forthright in our discussions with you as a major stockholder that had asked to participate as our partner in the transaction.
Sincerely,
James V. Mazzo
Chairman, President & CEO
From ValueAct's Letter: "We believe an AMO acquisition of B&L would impair our expected risk-adjusted return as AMO shareholders. The proposed acquisition increases business risk by further concentrating AMO cash flows in a consumer contact lens and lens care business that is clearly prone to product recalls and that has a long- term demand profile that is much more questionable than that of AMO's surgical business. The required debt financing reduces the margin for error operationally and, together with the proposed issuance of collarless equity, subjects current shareholders to significant capital markets risk. Finally, the proposed transaction raises substantial regulatory risk which you have told us is the reason that you do not yet have a commitment from any private equity partners.
But most concerning to us is the execution risk of a B&L acquisition. Against the backdrop of the Complete MoisturePlus recall and the integration of IntraLase, you are asking investors to believe that Randy and you can deliver on the synergies of integrating B&L, a company that is over twice the size of AMO (based on 2006 revenue), in what would be your most complicated acquisition to date. By your own admission this would be a stretch and would challenge already constrained management resources. In your July 5th press release, you stated that you intend to rely not on a strong management bench but on "a team of outside advisors to complete a rapid and successful integration".
We might feel differently had you demonstrated an ability to deliver in the past, but a B&L acquisition in your hands is simply too big a leap of faith in light of your public track record."
In response to ValueAct, Advanced Medical Optics issued a letter saying they are "surprised and disappointed" by their opposition to the merger. The company said, "Your opposition to this transaction is especially hard to understand given your expressed interest on June 12th in investing $700 million in equity in a B&L acquisition and your reaffirmation of a desire to participate in financing the transaction as recently as July 5th."
A Copy of ValueAct's Letter:
Dear Jim: (CEO)
ValueAct Capital ("ValueAct") now owns 8.8 million shares representing 14.7%of Advanced Medical Optics' ("AMO") common shares outstanding. I am writing to express ValueAct's opposition to AMO's proposed acquisition of Bausch &Lomb ("B&L"). I have copied B&L's board of directors on this letter so that they might consider our objection in evaluating AMO's offer. We understand that the proposed acquisition would require AMO shareholder approval. We intend to vote against the deal.
We believe an AMO acquisition of B&L would impair our expected risk-adjusted return as AMO shareholders. The proposed acquisition increases business risk by further concentrating AMO cash flows in a consumer contact lens and lens care business that is clearly prone to product recalls and that has a long-term demand profile that is much more questionable than that of AMO's surgical business. The required debt financing reduces the margin for error operationally and, together with the proposed issuance of collarless equity,subjects current shareholders to significant capital markets risk. Finally,the proposed transaction raises substantial regulatory risk which you have told us is the reason that you do not yet have a commitment from any private equity partners.
But most concerning to us is the execution risk of a B&L acquisition.Against the backdrop of the Complete MoisturePlus recall and the integration of IntraLase, you are asking investors to believe that Randy and you can deliver on the synergies of integrating B&L, a company that is over twice the size of AMO (based on 2006 revenue), in what would be your most complicated acquisition to date. By your own admission this would be a stretch and would challenge already constrained management resources. In your July 5th press release, you stated that you intend to rely not on a strong management bench but on "a team of outside advisors?to complete a rapid and successful integration".
We might feel differently had you demonstrated an ability to deliver in the past, but a B&L acquisition in your hands is simply too big a leap of faith in light of your public track record. You have yet to stick to or deliver a single number to which you have initially guided investors for the years 2005to 2008. The following table lays out the history:
Pro Forma EPS
2005 2006 2007 2008
Previous guidance $1.65 - $1.75 $2.20 - $2.30 $2.65+ $2.25 - $2.40
Date issued October 21, 2004 February 8, 2005 July 20, 2005 January 8, 2007
Actual / most recent guidance $1.48 $1.30 ($1.15) - ($0.95) $1.55 - $1.75% change based on mid-point (12.9%) (42.2%) - (29.0%)
In October 2004, you guided investors to $1.65 to $1.75 of next year proforma EPS. Today, almost three years later, your next year guidance is$1.55 to $1.75 ? more or less the same target. Is it a surprise that AMO'sstock price is in the same spot? On a prospective basis you have held out the carrot of $2.25+ of pro forma EPS, a target which has perpetually been around the corner ? first in 2006, then pushed out to 2007, then pushed out to 2008, and now in 2009 at the earliest. Just as $2.25 of pro forma EPS have yet to materialize, real earnings have yet to materialize. From 2002 to2006, cumulative one-time costs1 of $595 million have more than entirely offset cumulative operating profit2 of $445 million. How long will one-time acquisition and repositioning costs obfuscate the earnings power of the business? At some point you must execute on what you have and deliver on the promise. When you have yet to deliver actual earnings, it is unrealistic to ask us to believe you can execute an acquisition of the magnitude of B&L.
Our initial investment decision was based on the strength of the AMO's existing assets, specifically the surgical assets. Favorable demographics support solid secular growth rates, which we believe will be augmented byless emphasis on reimbursement-based demand and more emphasis on consumer-driven demand. The industry structure is conducive to sustainable,attractive margins and is one where innovation will expand the market and move market share.
We have always believed in AMO's business. It's the lack of discipline on the part of management and the board that has been our greatest concern.Randy has made the argument that AMO would not be where it is today, that is,bidding on B&L, if not for the acquisition program to date. As we describe above, there has been no per share earnings or stock price progress over the last three years. Randy's comments further our point that management and the board appear misguided in thinking absolute growth, at any cost, will also grow shareholder value. We have seen all too often acquisition-oriented management teams go "a bridge too far". AMO's attempt to acquire B&L raises operational, financial and regulatory risk that will distract management fromwhat should be top priorities in the near term including fixing the existing lens solution challenges, driving market adoption of multi focal IOLs and realizing the promised synergies of the IntraLase acquisition.
With all AMO has on its plate, the timing of this proposed deal could not be worse. The process is rushed, and the contemplated financing, with all its uncertainty to current equity holders, poses unacceptable risk. We feel the impulse to do the B&L deal right now is indicative of a management and board fixated on doing a deal at any cost. The B&L proxy statement filed today indicates that in October 2006 you initially expressed an interest in possibly acquiring B&L for "in excess of $60 per share". Faced with potentially losing the deal to Warburg Pincus ("Warburg"), you eventually increased this to $75. In addition, your June 20th proposal to acquire B&L included the concept of a 5% equity collar. The B&L board had issues with the "lack of price protection with respect to the stock component" so you ceded collar protection in your June 29th proposal, thus trading significant risk of dilution to current shareholders in order to stay in the hunt.
To the extent that an AMO and B&L combination makes sense, this property is not going into Warburg's hands forever. To the contrary, Warburg is a seller at some point; that is how they get paid. Management should take the lower risk path of fixing the solutions business and integrating prior acquisitions while letting Warburg handle the heavy lifting of the B&L turnaround. We want you to prove to your shareholders that you deserve to do a deal this big, by first executing on the current challenges and opportunities. By doing so, you will reduce AMO's cost of equity. While the B&L asset will be more expensive next time around, the risk-reward will be more attractive.
Sincerely,
Jeffrey W. Ubben
Managing Partner
ValueAct Capital
G. Mason Morfit
Partner
ValueAct Capital
Advanced Medical Optics' Response Letter:
Dear Jeff and Mason:
We were surprised and disappointed by your July 10th letter regarding our proposed acquisition of Bausch & Lomb. Your opposition to this transaction is especially hard to understand given your expressed interest on June 12th in investing $700 million in equity in a B&L acquisition and your reaffirmation of a desire to participate in financing the transaction as recently as July 5th.
Based on our review over the last several months, we believe the proposed acquisition of B&L offers a unique and compelling value-creating opportunity for AMO and all of its stockholders. As we stated in our July 5th press release, this transaction, which we believe would be significantly accretive on a cash basis in year two, would:
- Significantly expand AMO’s global scale and scope. With sales in over 100 countries and operations in over 50, B&L’s global reach would greatly enhance AMO’s ability to expand market opportunities and margins.
- Broaden and deepen AMO’s product portfolio. B&L’s strengths are in contact lenses and lens care, eye drops for dry eye, allergies and inflammation, vitamins for ocular health, vitreoretinal surgical products and post-operative prescription products. Combining these with AMO’s eye care, cataract and refractive products and technologies would create a broad-based product offering for physicians and further AMO’s stated strategy of providing the complete refractive solution.
- Enhance AMO’s ability to generate efficiencies and innovation. The combined global platform would provide significant opportunities to enhance efficiencies and create productivity improvements. Economies of scale would allow both companies to build on their unique and complementary heritages of product leadership and innovation within ophthalmology through increased investment in R&D.
We have every confidence that we have the experience and bandwidth to successfully complete the transaction and integrate the two businesses to create a stronger, more competitive combined company with a platform for sustained, profitable growth.
Your letter makes numerous inaccurate and misleading statements about the proposed transaction that we feel compelled to address:
• We strongly disagree with your assertions about the long-term demand profile of the contact lens and lens care businesses. This market has attractive long-term growth rates and, as you well know, has always been a central part of our Complete Refractive Solution strategy.
• We question your analysis of the collarless equity component. To be clear, our June 29th proposal was for a fixed number of shares, which would be set at the time of the merger agreement. Including a collar could have increased the number of shares AMO would be required to issue, thereby diluting our stockholders’ interest.
• We take issue with your blatant mischaracterization of our conversation regarding potential commitments from private equity firms. While we may pursue private equity financing in the future, we do not have commitments at the current time only because we have not sought them – and not because of any perceived regulatory risk.
• Regarding your portrayal of the regulatory risk associated with the transaction, we stated in our July 5th release that we have conducted a thorough review of the potential antitrust issues and are confident that we will be able to address these issues in a timely manner.
• The global recall of Moisture Plus is well underway and our eye care team is now focused on relaunching another product by the end of the third quarter. The IntraLase integration is effectively done and has been a tremendous success.
• We have been clear that a team of advisors is working in conjunction with our management team. We have every confidence that we have the necessary time and resources to focus on implementing a successful transaction.
• Your characterizations of earnings and guidance updates without reference to the context in which they were made are grossly misleading. The one-time charges you referenced were for acquisitions and repositioning efforts made in the latter half of the five-year period for which most of the accretion and value will be generated in future years. In the five years since AMO became an independent company, we have increased our enterprise value from $410 million to approximately $3.8 billion. This is strong evidence of our ability to create value.
We have been encouraged by the market reaction to our July 5th announcement and the positive feedback we have received from many stockholders on the strategic rationale and value-creation potential of the transaction.
We were very surprised by your unprovoked public attack. The content and tone of your letter are particularly disturbing because we have been open and forthright in our discussions with you as a major stockholder that had asked to participate as our partner in the transaction.
Sincerely,
James V. Mazzo
Chairman, President & CEO
Labels: Advanced Medical Optics, Bausch Lomb, BOL, EYE, ValueAct Capital
posted by Lon at 9:46 AM
0 Comments:
Post a Comment
<< Home