AlPharma's "High-Price Hooker" Strategy May Backfire in King M&A Battle

In King Pharmaceuticals' allegedly hostile takeover attempt of AlPharma, the target company is utilizing what I like to call the Ashley Dupre (pictured) strategy: It's saying, Yes, you can have me, but I don't come cheap.

I say "allegedly hostile" because AlPharma has made it clear from the get-go that it is happy to be acquired at the right price. The business press has focused on the rejection of King's first bid of $33 a share (a premium on its $24-and-change price at the time), and then the rejection of King's tender offer of $37 for all shares.

But look at the tone of the communications between the companies. When AlPharma rejected King's first offer, CEO Dean J. Mitchell wrote to King chairman Brian A. Markison:

We are willing to entertain a proposal from you that we believe more appropriately values the Company. To that end, we remain open to discussions with you at a price that we believe reflects the inherent value of Alpharma as well as the significant benefits, as your letter and comments to investors earlier today describe, that would accrue to King as a result of the transaction. If you have an interest in engaging in a dialogue on that basis, please contact me at your earliest convenience.

Here's AlPharma's recent "rejection" of King's latest offer:

King communicated its revised proposal to Alpharma last week, and we invited them to enter into a process designed to ensure Alpharma shareholders receive full and fair value for their investment in our Company. We continue to welcome and encourage King's participation in that process.

But AlPharma's adoption of a "poison pill" -- in which shareholders receive extra shares if any company acquires 15% or more of AlPharma, thus diluting the stock so that any acquirer ends up wasting their money -- may be a price hike too far.

It's worth bearing in mind why King is so keen on this deal. In a nutshell, King's near-term prospects are fading. Consider: King's revenues collapsed from $542 million to $396 million last quarter. A neat summary of King's troubles can be found on Motley Fool. But a more chilling taste of them came in the company's last conference call. CFO Joseph Squicciarino explained that revenues had sunk largely because its Altace hypertension brand faced generic competition:

I think the way that you should think about that is sales, net sales for Altace in the second quarter were $44 million. As we speak the generic have captured 90% share of the ramipril market. So we really in our forecast here have Altace at extremely low levels for the balance of this year, very low levels, can measure with 90% current share for the generic and that's going to go no where but north ... between now and the end of the year.

And while AlPharma has generated some good news recently around its Embeda abuse-resistant painkiller, shareholders might want to consider that just because management is growing revenues doesn't mean they're business geniuses. Sales went from from $133 million to $167 million last quarter, but AlPharma still somehow lost money due mainly to marketing expenses that went through the roof.

King, by contrast, made a small profit despite the 27% skid in its overall business. Management that can continue to make money in even the toughest of environments is something that AlPharma's shareholders should give serious consideration to, especially when they are coming at you with a 67% premium on your stock. Conclusion: AlPharma is raising its price just as its big-spending trick, King, is getting poorer by the minute.

Being a high-price call girl is all very well -- but if she can't close the deal, even the classiest escort goes home empty-handed.