Case Study 3.1
Teva Acquires Cephalon in a Hostile Takeover in the European Market for Corporate Control

1. While Valeant was more likely to be an aggressive cost cutter, both firms anticipated improving earnings performance through significant cost savings by combining operations and eliminating duplicate overhead. Valeant also believed Cephalon would complement their own offering.
Teva was under pressure to diversify its product offering to include a greater percentage of higher margin branded drugs. Like many pharmaceutical companies, they were vulnerable to the loss of patent protection on a key drug and were seeking access to a firm with a substantial number of new drugs under development.

2. Both firms initially approached Cephalon on a friendly basis, interested in avoiding an auction for the target and the potential for customer attrition, loss of key employees, and disruption to suppliers if the acquisition became hostile. However, Valeant decided to pressure the target by going directly to the shareholders with an all-cash hostile tender offer. Simultaneously, the firm initiated a proxy fight in an attempt to change the composition of the Cephalon board in order to have the board rescind the firm’s shareholder rights plan (poison pill), which if triggered would have increased the cost of the takeover. Valeant used a consent solicitation card which would enable Cephalon shareholders to support Valeant’s slate of directors without scheduling a formal shareholders meeting to hold a vote for directors. Teva assumed the role of white knight since it was the partner preferred by Cephalon’s directors and senior management. Teva’s most potent takeover weapon was its willingness to pay about 12 percent more than Valeant for Cephalon. It justified the higher price by placing a greater value on Cephalon’s drug pipeline.

3. Both companies could have