David Pyott had been the CEO of Allergan for nearly 17 years in April 2014, when Valeant Pharmaceuticals and Pershing Square Capital Management initiated the hostile takeover bid described in the accompanying article “The Error at the Heart of Corporate Leadership.” He was the company’s sole representative during the takeover discussions. When it became clear that the bid could not be fended off indefinitely, Pyott, with his board’s blessing, negotiated a deal whereby Allergan would be acquired by Actavis (a company whose business model, like Allergan’s, was growth oriented).
HBR: Would you describe Allergan’s trajectory in the years leading up to the takeover bid?
PYOTT: We’d experienced huge growth since 1998, when I joined as just the third CEO of Allergan and the first outsider in that role. We restructured when I came in and again 10 years later, during the recession. Those cuts gave us some firepower for investing back into the economic recovery. After the recession we were telling the market to expect double-digit growth in sales revenue and around the mid-teens in earnings per share.
Your investor relations must have been excellent.
They were. I am extremely proud to say that we literally never missed our numbers, not once in 17 years. We also won lots of awards from investor-relations magazines. You don’t run a business with that in mind, but it’s nice to be recognized.
In their article, Joseph Bower and Lynn Paine describe how difficult it is for any company to manage the pressure from investors who want higher short-term returns. You seem to have managed that well—until Valeant showed up. How?
Both buy-side and sell-side investors are like any other customer group. You should listen to what they say and respond when you can. But remember: Asking is free. If they say, “Hey, we want more,” you have to be willing to come back with “This is what we can commit to. If there are better places to invest your funds, then do what you need to.” Fortunately or unfortunately, I’m very stubborn.
Permit me a naive question: Since Allergan was going strong, why did it make sense to Valeant/Pershing Square to take you over and strip you down? I get that they’d make a lot of money, but wouldn’t fostering continued growth make more in the long run?
Different business models. Valeant was a roll-up company; it wasn’t interested in organic growth. Michael Pearson [Valeant’s CEO] liked our assets—and he needed to keep feeding the beast. If he didn’t keep on buying the next target, then the fact that he was stripping all the assets out of companies he’d already bought would have become painfully obvious.
Fortunately or unfortunately, I’m very stubborn.
He couldn’t do it alone, given his already weak balance sheet, so he brought Ackman in—and Pershing Square acquired 9.7% of our stock without our knowledge. This was meant to act as a catalyst to create a “wolf pack.” Once the hedge funds and arbitrageurs get too big a position, you lose control of your company.
I still thought we had a strong story to tell—and I hoped I could get long-term-oriented shareholders to buy new stock and water down the hedge funds’ holdings. But almost nobody was willing to up their position. They all had different reasons—some perfectly good ones. It was a lesson to me.
That must have been disappointing.
Yes. It’s poignant—some of those same people say to me now, “We miss the old Allergan. We’re looking for high-growth, high-innovation stocks and not finding them.” I just say, “I heartily agree with you.”
Another thing that surprised and disappointed me was that I couldn’t get people who supported what we were doing—who understood why we were not accepting the bid, which grossly undervalued the company—to talk to the press. Several people said they would, but then folks at the top of their companies said no. And the reporters who cover M&A don’t know the companies well. The people who cover pharma are deeply knowledgeable—but once a company is in play, those guys are off the story day-to-day. So the coverage was more one-sided than we’d have hoped for.
Is the trend toward activist investors something that the market will eventually sort out?
Activist and hostile campaigns have been propelled by extraordinarily low interest rates and banks’ willingness to accept very high leverage ratios. Recently investor focus has returned to good old-fashioned operational execution by management. But I do think that investment styles go in and out of fashion. I never would have guessed that when I went to business school.
Do you agree with Bower and Paine that boards and CEOs need to focus less on shareholder wealth and more on the well-being of the company?
Look at it from a societal point of view: A lot of the unrest we’ve seen over the past year is rooted in the idea that wealthy, powerful people are disproportionately benefiting from the changes happening in society. A lot of companies think that they need to make themselves look more friendly, not just to stockholders but to employees and to society. Having a broader purpose—something beyond simply making money—is how you do that and how you create strong corporate cultures.
I don’t believe that strong performance and purpose are at odds, not at all. My own experience tells me that in order for a company to be a really high performer, it needs to have a purpose. Money matters to employees up to a point, but they want to believe they’re working on something that improves people’s lives. I’ve also found that employees respond really favorably when management commits to responsible social behavior. I used to joke with employees about saving water and energy and about recycling: “Look, I’m Scottish, OK? I don’t like waste, and it saves the company money.” That’s a positive for employees.
Absolutely. I left day-to-day operations to our president, Doug Ingram, that year. And we grew the top line 17%—more than $1 billion—the best operating year in our 62-year history. I remember an R&D team leader who came up to me in the parking lot and said, “Are you OK? Is there anything I can do?” I answered him, “Just do your job better than ever, and don’t be distracted by the rubbish you read in the media.” Employees all over the world outdid themselves, because they believed in the company.
I think it’s hard for a CEO to change his or her spots.
What changes in government rules and regulations would improve outcomes for the full range of stakeholders?
My favorite fix is changing the tax rates. Thirty-five percent is woefully high relative to the rest of the world. If we got it down to 20%, we’d be amazed at how much investment and job creation happened in this country. The high rates mean that we’re vulnerable to takeovers that have tax inversion as a motivator. We were paying 26%, and Valeant [headquartered in Canada] paid 3%. I think the capital gains taxes could be changed—in a revenue-neutral way—to incentivize holding on to stocks longer.
Shifting gears again: If a company wants to reorient itself toward long-term growth, what has to happen?
I think it’s hard for a CEO to change his or her spots. Some can, but most can’t. So in most cases you’re going to need a new leader. And the board of directors really has to buy into it, because not only are you changing your strategy, you’re changing your numbers. You must have a story to tell, for example: “For the next three years, we’re not going to deliver 10% EPS growth. It’s going to be 5% while we invest in the future. And that’s not going to pay off until after three years, so you’ll have to be patient.” You have to be very, very clear about it.
And then everyone—the board, the investors, the lab technicians, the salespeople—will watch you to see if you’re serious. It will take a lot of fortitude and determination. It’s not impossible, but it’s extremely difficult.