M&A Watch: Alcon's Minorty Shareholders Getting the Short End of the Sale

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Novartis (NVS) has worked aggressively to purchase Alcon (ACL), a major eye-care company, from Nestlé. The deal-making started a couple of years ago when Novartis shelled out $10.4 billion to Nestlé for a 25% equity stake in Alcon. Now, the company is finally getting its prize through an option to buy the remaining 52% from Nestlé (NSRGY) and buying 23% from minority shareholders. In all, it's a $50 billion transaction.While the purchase makes a lot of sense for Novartis, which is facing the expiration of some key drugs in its catalog, the consequences are not so good for Alcon's minority shareholders. For example, Nestlé is getting $180 a share in cash whereas the minority holders are getting $153 a share in Novartis stock.

This is downright unfair. Keep in mind that such a result is usually forbidden under corporate law. But it's legal under Swiss law, and Switzerland is where Novartis is domiciled. According to one of the authors of the Swiss rules, the main reason that such structures are legal there is that many Swiss companies are family-controlled, and the flexibility of the law lets those families receive appropriate extra compensation in such deals.

Of course, this is no consolation to U.S. shareholders. In fact, to make things worse, U.S. shareholders have no right to vote on the matter. This is the case even though Alcon's shares are listed on the NYSE.

It's true that the Novartis shares may ultimately turn out to generate strong returns -- so long as the Novartis-Alcon combination generates the expected synergies. All in all, the global eye-care business looks particularly attractive, especially in emerging markets like China. What's more, Novartis has lots of experience in pulling off large purchases.

But when it comes to mega-acquisitions, things are always iffy.

Not Your Typical Stock-Swap

There is another potential problem for U.S. shareholders: taxes.

In a typical stock-swap, there are no taxable consequences as long as certain IRS rules are met that allow it to qualify as a reorganization. Unfortunately, the Novartis-Alcon deal is different.

This is according to corporate tax expert Robert Willens, who thinks the structure does not qualify as a reorganization. It's complicated stuff, but essentially, the minority shareholders need Novartis to be buying at least 40% of the company in the transaction to show a "continuity of interest." On the surface, this requirement seems to be satisfied: Novartis is picking up 75% of Alcon. However, Willens believes that, because the intention of Novartis has been to purchase the the rest of Nestlé's stake in the company since it bought the first 25% in 2008, the purchase of Nestlé's remaining 52% counts as part of the older deal, not the current one. And that will leave Alcon shareholders owing capital gains on the shares they receive.

What can be done? Already, there are several shareholder lawsuits. But these are expensive and time consuming -- even more so in this case, in light of the fact that it involves another country's securities laws. And in such cases, it's usually the attorneys that make the big bucks.

In the end, Novartis may add a little more to its offer -- but don't expect much. As is often the case, it's usually not good to be a minority shareholder.
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