Allergan Trading Spiked Before Ackman-Valeant Announcement

Apr 24 2014 | 1:52pm ET

Pershing Square Capital Management founder William Ackman is basking in praise from an unusual corner as regulators look into the surge in trading around the pharmaceutical company he recently bought a nearly 10% stake in.

Valeant Pharmaceuticals International this week announced a $46 billion bid for Botox maker Allergan Inc. Valeant is working with Ackman, who announced a 9.7% stake in Allergan and his support for Valeant’s offer.

Pershing Square has been building its stake in Allergan since February. But the hedge fund didn’t begin its “rapid accumulation program” until April 11—one that ran for 10 days and which may, in spite of Pershing Square’s best efforts, have alerted other traders that something was afoot.

Ackman used a subsidiary, PS Fund 1, to build the stake, primarily through over-the-counter options. But even those precautions couldn’t mask the increased activity around the stock, as Allergan’s implied volatility spiked and its daily options volume tripled.

Volume in Allergan shares nearly doubled in the 10 days prior to Valeant’s offer.

While there is no indication that anyone was tipped off, the Securities and Exchange Commission is examining the unusual trading. Pershing Square  has denied any wrongdoing.

Meanwhile, Ackman’s play for Allergan has won him plaudits from one of his most bitter enemies: Carl Icahn. The two men have been battling for more than a decade, most recently over nutritional supplements company Herbalife, which Ackman says is a pyramid scheme.

“We have our differences, but I never said he’s not a smart guy,” Icahn told CNBC yesterday. “I think the concept of this is good. I hope it works out better for him than Herbalife did, and I think it will.”

“There’s nothing wrong with making a bid for a company and using someone else’s funds.”

Ackman certainly plans to be making bids on other companies. He said this week that the Valeant-Allergan deal is “not the last deal we’re going to do. We’re already talking about the next deal we’re going to do with Valeant.”

“There are $10 trillion worth of targets,” Ackman said. “I call this the shopping list.”

He may employ one of the four other subsidiaries Pershing Square created in Delaware in February. In addition to PS Fund 1, which bought the Allergan stake, there are PS Funds 2 through 5.

The practice is not unusual for Ackman: Pershing Square has created some three dozen such subsidiaries, most called Pershing Square Holdco or a variant, The New York Times reports.

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