Question

In April 2015, Teva Pharmaceuticals launched a $40 billion hostile bid for Mylan Pharmaceuticals, which was itself trying to acquire the Perrigo Company (another pharmaceutical company) in a $36 billion hostile deal. As reported in an FT article from April 2015:

“The value of Mylan’s bid for Perrigo is hotly disputed because the value of Mylan’s shares is being inflated by takeover interest from Teva. Mylan’s stock price would likely fall if Teva’s approach were to fail, leading to a corresponding decline in the value of its offer for Perrigo. Mylan said the value of its new offer was $232.23 per Perrigo share, based on its closing stock price on April 8, the day after the market reacted to its initial proposal. However, that valuation is contested by Perrigo’s board, which considers Mylan’s offer to be $202.20, based on Mylan’s stock price on March 10, just before it was rumored that Teva would make a bid for Mylan.”

Teva also stated that its bid for Mylan is conditional on Mylan dropping its bid for Perrigo. In other words, the probability that both deals are completed is 0%.

-Mylan’s stock closed at $55.31 on 10 March, the day before rumors appeared regarding Teva’s interest in making a takeover bid.

- Mylan’s stock closed on 31 April 2015 at $71.35.

-Teva’s bid for Mylan is $82 per share.

-You may assume that Teva’s bid is an all-cash bid, and you may assume that interest rates are zero.

Given this information, what is the market’s assessment of the probability that the Teva-Mylan deal will be completed?

Answer 1

Market’s assessment of the probability that the Teva-Mylan deal will be completed shows that the probability of the deal being completed is very low. This is because the deal is now caught in a circular loop and while Teva is bidding for Mylan on one hand Mylan is bidding for Perrigo on the other hand. The valuation of both the deals hinges on each other as the value of Mylan’s shares is being inflated by takeover interest from Teva.

A circular loop is created as the stock price of Mylan is dependent on Teva’s approach and this in turn will determine the offer value for Perrigo that Mylan will make. Moreover Teva’s bid for Mylan is based on the condition that Mylan stops pursuing Perrigo as a possible acquisition target. This loop has led the market’s assessment of the probability that the Teva-Mylan deal will be completed to be very low, even nil in case of few assessments.