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You can find the current article at its original source at http://www.theguardian.com/business/nils-pratley-on-finance/2016/mar/21/valeant-pharmaceutical-company-michael-pearson-rolls-royce-mike-ashley
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| Valeant's 'simple philosophy' comes undone in the real world Valeant's 'simple philosophy' comes undone in the real world | |
| (about 5 hours later) | |
| “Be decisive, stay balanced, and always find ways to grow,” trumpeted the front page of Valeant’s last annual report, a yearly exercise in bragging about how this deal-hungry Canadian company had reinvented the pharmaceutical industry with its “simple philosophy”. | “Be decisive, stay balanced, and always find ways to grow,” trumpeted the front page of Valeant’s last annual report, a yearly exercise in bragging about how this deal-hungry Canadian company had reinvented the pharmaceutical industry with its “simple philosophy”. |
| The next annual report – when it appears – should be a corker. All of those supposed qualities have evaporated in less than a year. Valeant cannot even be decisive about its past accounts: recent reports “should no longer be relied upon”. | The next annual report – when it appears – should be a corker. All of those supposed qualities have evaporated in less than a year. Valeant cannot even be decisive about its past accounts: recent reports “should no longer be relied upon”. |
| As for balance, Valeant is hopelessly lopsided now its share price has fallen from $257 last July to $29. The equity is worth $10bn (£7bn) but borrowing stands at $30bn. On the growth front, the game is over for an acquisition-led strategy that drove a $40bn spree in eight years. | As for balance, Valeant is hopelessly lopsided now its share price has fallen from $257 last July to $29. The equity is worth $10bn (£7bn) but borrowing stands at $30bn. On the growth front, the game is over for an acquisition-led strategy that drove a $40bn spree in eight years. |
| In the circumstances, Monday’s departure of its chief executive, Michael Pearson, was inevitable. The only surprise is that he’s staying on until a successor can be found. Still, Pearson is one step ahead of Howard Schiller, his former chief financial officer, who has been asked by the board to resign but has refused to do so. | In the circumstances, Monday’s departure of its chief executive, Michael Pearson, was inevitable. The only surprise is that he’s staying on until a successor can be found. Still, Pearson is one step ahead of Howard Schiller, his former chief financial officer, who has been asked by the board to resign but has refused to do so. |
| Arriving on the board is the famous hedge fund manager Bill Ackman of Pershing Square, owner of 9% of Valeant. Ackman, presumably, feels the boardroom is the better place to continue his reported squabbles with Valeant’s other hedge fund backer, ValueAct. What a mess. | Arriving on the board is the famous hedge fund manager Bill Ackman of Pershing Square, owner of 9% of Valeant. Ackman, presumably, feels the boardroom is the better place to continue his reported squabbles with Valeant’s other hedge fund backer, ValueAct. What a mess. |
| Wise old birds in the pharmaceutical industry have warned for ages that the only “simple” feature of Valeant’s strategy was its ruthless desire to jack up the prices of medicines while reducing spending on original research. The first part of that strategy has hit a political roadblock in the US in the form of Hillary Clinton. The second part now looks a serious drawback. | Wise old birds in the pharmaceutical industry have warned for ages that the only “simple” feature of Valeant’s strategy was its ruthless desire to jack up the prices of medicines while reducing spending on original research. The first part of that strategy has hit a political roadblock in the US in the form of Hillary Clinton. The second part now looks a serious drawback. |
| Consider Valeant yet another example of the smart guys discovering that the real world does not always fit their fine theories about how to create value. Pearson had a 23-year career at consultants McKinsey before Valeant; Schiller did 24 years at Goldman Sachs; Ackman and the ValueAct brigade are supposed to be hedge fund geniuses. | Consider Valeant yet another example of the smart guys discovering that the real world does not always fit their fine theories about how to create value. Pearson had a 23-year career at consultants McKinsey before Valeant; Schiller did 24 years at Goldman Sachs; Ackman and the ValueAct brigade are supposed to be hedge fund geniuses. |
| Naturally, the executives have been paid spectacularly for Valeant’s “unparalleled success”, as the 2013 annual report put it. The rest of us should cheer evidence that lasting success in an important industry such as pharmaceuticals requires more than financial engineering and cost-cutting. | Naturally, the executives have been paid spectacularly for Valeant’s “unparalleled success”, as the 2013 annual report put it. The rest of us should cheer evidence that lasting success in an important industry such as pharmaceuticals requires more than financial engineering and cost-cutting. |
| Rolls’s red carpet treatment ill-judged | Rolls’s red carpet treatment ill-judged |
| Rolls-Royce’s shareholders, incidentally, should take a keen interest in Valeant’s woes. ValueAct, the US hedge fund mentioned above, is the same crew that has bought 10.8% of Rolls, the UK’s best engineering company, and successfully lobbied for a seat on the board. | Rolls-Royce’s shareholders, incidentally, should take a keen interest in Valeant’s woes. ValueAct, the US hedge fund mentioned above, is the same crew that has bought 10.8% of Rolls, the UK’s best engineering company, and successfully lobbied for a seat on the board. |
| Rolls’s chairman, Ian Davis, was rash to make the offer, as argued here at the time. After Valeant, the decision to roll out the red carpet looks ridiculous. Rolls shareholders, when they vote, should say no. | Rolls’s chairman, Ian Davis, was rash to make the offer, as argued here at the time. After Valeant, the decision to roll out the red carpet looks ridiculous. Rolls shareholders, when they vote, should say no. |
| MPs must not back down on Sports Direct | MPs must not back down on Sports Direct |
| Mike Ashley has gone where James and Rupert Murdoch feared to tread. Sports Direct’s founder is refusing to attend a parliamentary select committee – or, rather, he says it is not his “current intention” to turn up on 7 June. The Murdochs, by contrast, conceded in 2011 during the phone-hacking scandal that, on reflection, attendance would be best. | Mike Ashley has gone where James and Rupert Murdoch feared to tread. Sports Direct’s founder is refusing to attend a parliamentary select committee – or, rather, he says it is not his “current intention” to turn up on 7 June. The Murdochs, by contrast, conceded in 2011 during the phone-hacking scandal that, on reflection, attendance would be best. |
| It is possible that Ashley could yet perform a U-turn but, by calling the MPs on the business committee “a joke” and accusing them of “showboating”, he has left himself little room for manoeuvre. It looks to be a calculated two-part gamble. First, by hoping that committee chair, Iain Wright, lacks the resolve to test parliamentary procedures. Second, a bet that the worst punishment might be a ticking-off by the House of Commons, which Ashley might regard as a moral victory. | It is possible that Ashley could yet perform a U-turn but, by calling the MPs on the business committee “a joke” and accusing them of “showboating”, he has left himself little room for manoeuvre. It looks to be a calculated two-part gamble. First, by hoping that committee chair, Iain Wright, lacks the resolve to test parliamentary procedures. Second, a bet that the worst punishment might be a ticking-off by the House of Commons, which Ashley might regard as a moral victory. |
| At one level, the row is merely about where the game should be played since Ashley says the committee is welcome to visit Sports Direct’s warehouse in Shirebrook. He seems to think only an away fixture in Westminster would amount to “public vilification”. | At one level, the row is merely about where the game should be played since Ashley says the committee is welcome to visit Sports Direct’s warehouse in Shirebrook. He seems to think only an away fixture in Westminster would amount to “public vilification”. |
| This distinction is silly. It is up to MPs to decide how they conduct their inquiry into working conditions at the retailer. Imagine if HSBC – when the bank had faced allegations about dodgy tax practices in Switzerland – argued that MPs’ concerns would dissolve if only they took a trip to Zurich to see the new data system. The outside world would rightly deplore the feebleness. | This distinction is silly. It is up to MPs to decide how they conduct their inquiry into working conditions at the retailer. Imagine if HSBC – when the bank had faced allegations about dodgy tax practices in Switzerland – argued that MPs’ concerns would dissolve if only they took a trip to Zurich to see the new data system. The outside world would rightly deplore the feebleness. |
| Wright should continue to push for Ashley’s appearance to protect the authority of future inquiries. The MPs will only be a joke if they back down. | Wright should continue to push for Ashley’s appearance to protect the authority of future inquiries. The MPs will only be a joke if they back down. |