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Written by Gary F. Smith
Publish Date: 2024-12-03

Harvard Case - The Allergan Board Under Fire (A)

"The Allergan Board Under Fire (A)" Harvard business case study is written by Lynn Sharp Paine, Suraj Srinivasan, John Coates, David Lane. It deals with the challenges in the field of General Management. The case study is 38 page(s) long and it was first published on : Jan 4, 2016

At Fern Fort University, we recommend that the Allergan Board of Directors immediately implement a comprehensive plan to address the concerns raised by the activist investor, Carl Icahn. This plan should prioritize corporate governance reform, a strategic review of the company's portfolio, and a commitment to shareholder value creation. This approach will require a significant shift in Allergan's organizational culture, leadership style, and decision-making processes to foster transparency, accountability, and a long-term focus on sustainable growth.

2. Background

Allergan, a leading pharmaceutical company, faced pressure from Carl Icahn, an activist investor, who criticized the company's performance, corporate governance practices, and strategic direction. Icahn argued that Allergan was undervalued and that its board was not acting in the best interests of shareholders. This case study explores the challenges faced by Allergan's board in responding to Icahn's demands and navigating the complex landscape of shareholder activism.

The main protagonists in this case are Allergan's Board of Directors, led by Chairman and CEO Brent Saunders, and Carl Icahn, the activist investor who launched a public campaign to influence Allergan's strategy.

3. Analysis of the Case Study

This case study can be analyzed through the lens of several frameworks:

  • Corporate Governance: Allergan's governance structure was criticized for its lack of independence and transparency. Icahn's demands for board changes and a strategic review highlighted the need for a more robust and responsive governance framework.
  • Strategic Analysis: Allergan's strategy was questioned for its focus on acquisitions and its lack of a clear long-term growth plan. A SWOT analysis reveals Allergan's strengths (strong brand, diverse product portfolio, research and development capabilities) and weaknesses (high debt, dependence on acquisitions, lack of clear strategic direction).
  • Stakeholder Management: The case highlights the importance of managing diverse stakeholder interests, including shareholders, employees, customers, and the public. Allergan's failure to effectively communicate its strategy and address shareholder concerns contributed to the conflict with Icahn.
  • Change Management: Implementing the necessary changes to address Icahn's demands requires a comprehensive change management plan that addresses organizational culture, leadership styles, and decision-making processes.

4. Recommendations

To address the challenges and achieve sustainable growth, Allergan should implement the following recommendations:

  1. Corporate Governance Reform:

    • Independent Board: Appoint a majority of independent directors with proven experience in the pharmaceutical industry and a strong commitment to shareholder value creation.
    • Transparency and Accountability: Enhance transparency by providing detailed disclosures on financial performance, strategic plans, and risk management practices. Implement a robust system for monitoring and evaluating executive compensation.
    • Shareholder Engagement: Establish a formal process for engaging with shareholders, including regular communication and feedback mechanisms.

  2. Strategic Review and Portfolio Optimization:

    • Long-Term Growth Strategy: Develop a clear and compelling long-term growth strategy that focuses on organic growth, innovation, and market leadership.
    • Portfolio Optimization: Conduct a comprehensive review of the company's product portfolio and divest non-core assets to focus resources on high-growth areas.
    • Innovation and R&D: Invest in research and development to create innovative products and technologies that address unmet medical needs.

  3. Organizational Change and Culture:

    • Leadership Style: Foster a leadership style that prioritizes transparency, accountability, and long-term value creation.
    • Decision-Making Processes: Implement a more decentralized and data-driven decision-making process that involves key stakeholders.
    • Culture of Performance: Cultivate a performance-driven culture that rewards innovation, collaboration, and customer focus.

  4. Shareholder Value Creation:

    • Financial Performance: Improve financial performance through cost optimization, operational efficiency, and strategic investments.
    • Dividend Policy: Implement a consistent and sustainable dividend policy that reflects the company's long-term profitability.
    • Share Buybacks: Consider share buybacks as a way to return capital to shareholders and enhance shareholder value.

5. Basis of Recommendations

These recommendations are based on the following considerations:

  1. Core Competencies and Mission: The recommendations align with Allergan's core competencies in research, development, and commercialization of pharmaceutical products. They also support the company's mission to provide innovative treatments that improve patients' lives.
  2. External Customers and Internal Clients: The recommendations prioritize customer satisfaction by focusing on product innovation and quality. They also aim to create a more engaged and motivated workforce by fostering a culture of performance and collaboration.
  3. Competitors: The recommendations address the competitive landscape by focusing on innovation, market leadership, and operational efficiency.
  4. Attractiveness: The recommendations are expected to increase shareholder value by improving financial performance, enhancing operational efficiency, and creating a more sustainable growth trajectory.

6. Conclusion

By implementing these recommendations, Allergan can address the concerns raised by Carl Icahn, restore shareholder confidence, and achieve sustainable growth. This requires a commitment from the Board of Directors to prioritize long-term value creation, embrace transparency and accountability, and foster a culture of innovation and performance.

7. Discussion

Other alternatives not selected include:

  • Acquiring a Company: While acquisitions have been a key part of Allergan's growth strategy, they carry significant risks and may not be the most sustainable approach.
  • Divesting the Entire Company: This option would be a drastic measure and would likely result in significant disruption to the business.

Key assumptions underlying these recommendations include:

  • The Board's Commitment to Change: The recommendations will only be successful if the Board of Directors is committed to implementing them fully and consistently.
  • Market Conditions: The recommendations assume a favorable market environment for the pharmaceutical industry.

8. Next Steps

To implement these recommendations, Allergan should:

  • Form a Task Force: Establish a task force composed of independent directors, senior executives, and external experts to oversee the implementation process.
  • Develop a Timeline: Create a detailed timeline with key milestones for each recommendation.
  • Communicate Regularly: Regularly communicate with shareholders and other stakeholders about the progress made in implementing the recommendations.

By taking these steps, Allergan can transform itself into a more transparent, accountable, and shareholder-focused company, positioning itself for sustainable growth and long-term success.

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Case Description

In 2014, the Allergan Inc. board of directors received a surprise takeover offer from Valeant Pharmaceuticals in alliance with hedge fund activist Bill Ackman's Pershing Square Capital Management. In the unprecedented arrangement between an acquirer and a hedge fund activist, Pershing Square had quietly amassed a 9.7% stake in Allergan prior to the Valeant bid, making Pershing Square Allergan's largest shareholder. The case presents students with many of the decisions Allergan's directors faced amid challenges to Allergan's governance, management, and business model. In particular, the Allergan board must decide whether to pursue a $10 billion acquisition of Salix Pharmaceuticals while under threat of a proxy contest and a special shareholder meeting to vote on replacing Allergan's directors with a slate more favorable to the Valeant merger. The proposed Salix acquisition would give Allergan a new therapeutic market but would also make Allergan too big for Valeant to acquire.

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