Investor group opposes B&L acquisition

Key Points

One of Advanced Medical Optics (AMO) Inc.'s major investors has thrown a roadblock in the company's quest to acquire Bausch & Lomb (B&L).

In a July 10 letter to AMO Chairman, President, and Chief Executive Officer James V. Mazzo, ValueAct Capital-which owns 14.7% of the company's common shares-said it believes the company's proposed acquisition poses an "unacceptable risk," and it intends to vote against the deal.

Just 5 days earlier, AMO had offered to acquire Bausch & Lomb for $75 per share-$45 in cash and $30 in AMO stock. The offer tops Warburg Pincus' $65 cash per share deal announced May 16 (Ophthalmology Times, June 1, 2007, Pages 1 and 6). Under terms of that agreement, Bausch & Lomb was permitted to "go shop" for a superior offer. In announcing the AMO offer July 5, Bausch & Lomb said its board of directors had determined that the AMO deal "is reasonably likely to result in a superior proposal," although a special committee will continue to explore it.

"This is a truly unique opportunity that would enable AMO to accelerate our strategic goal of providing a full range of advanced technologies to address the vision needs of patients of all ages," Mazzo said in a prepared statement announcing his company's offer. "I am confident that delivering on this strategy will allow us to generate significant value for shareholders and create new opportunities for our combined employee base."

ValueAct Capital said it is not so confident, however. In documents filed with the Securities Exchange Commission, the San Francisco-based private investment firm said the proposed acquisition by AMO would reduce shareholder returns, present substantial risk, and "is fundamentally ill advised." ValueAct holds 8.8 million shares of about 68.5 million outstanding AMO shares.

"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 company wrote in a letter to Mazzo. "The required debt financing reduces the margin for error operationally, and ... subjects current shareholders to significant capital markets risk."

The letter, signed by Jeffrey W. Ubben (managing partner) and G. Mason Morfit (partner), stated that AMO has not yet delivered on promised earnings increases following the acquisitions of VISX (May 2005), WaveFront Sciences (January), and IntraLase (April).

"A B&L acquisition in your hands is simply too big a leap of faith in light of your public track record," the letter continued, pointing to cumulative one-time costs of $595 million from 2002 to 2006 against cumulative operating profits 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," the letter stated. "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"-a company twice its size.

ValueAct said it believed AMO's surgical assets held the greatest promise for growth, particularly with regard to consumer-driven demand.

"It's the lack of discipline on the part of management and the board that has been our greatest concern," the investors continued. "Management and the board appear misguided in thinking absolute growth, at any cost, will also grow shareholder value. ... AMO's attempt to acquire B&L raises operational, financial, and regulatory risk that will distract management from what should be top priorities in the near term, including fixing the existing lens solution challenges, driving market adoption of multifocal IOLs, and realizing the promised synergies of the IntraLase acquisition."