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Unnamed Suitor Enters PPD Sweepstakes

By Jenny Callison, posted Oct 17, 2011

It looks as though PPD’s shopping expedition has netted another potential buyer for the company.

On October 14, the company submitted a regulatory filing with the Securities and Exchange Commission stating it has entered into a confidentiality agreement with another entity interested in acquiring the Wilmington-based contract research organization.

Although PPD already has a firm offer on the table from private equity firms The Carlyle Group and Hellman & Friedman, its agreement with the two firms gives it a 30-day “go shop” period during which it is working with Morgan Stanley to solicit higher bids. The Carlyle Group and Hellman & Friedman have proposed to purchase PPD for roughly $3.9 billion, or $33.25 per share.

As of 3:30 p.m. Monday, PPD shares were trading at $33.05 on NASDAQ.

Morgan Stanley reportedly has contacted 22 parties to see whether any were interested in making a rival bid for PPD. Only one has stepped forward – the one mentioned in the filing – but no formal bid has been announced. The “go-shop” window closes at the end of the day on November 1.

Often other bidders will come in if they think a company’s price has been undervalued, said Joseph Farinella, associate professor of finance at UNC Wilmington.

“This, ultimately, is the free market at work,” he said. “You want other bidders, so that the sale produces the best price, benefiting the company and the shareholders.”

Farinella said the challenge such shopping trips pose is that a higher bidder may not be as compatible with the company’s goals or corporate culture as the original bidder. “They may want to take the company in different directions, which could involve such actions as laying off employees,” he said.

On October 11, a stockholder in California filed suit against PPD and Morgan Stanley in the U.S. District Court for Eastern North Carolina, alleging that the price offered by The Carlyle Group and Hellman & Friedman undervalued the company’s worth and that officers and directors of PPD had breached their fiduciary duties in several ways by not searching more diligently for a higher purchase price.

PPD’s filing with the SEC included detailed information about the background to the proposal to sell the company to the private equity firms.

Below is that section from the company’s filing:

As part of their ongoing oversight and management of the Company’s business, the board of directors regularly reviews and assesses strategic alternatives available to the Company, in light of the Company’s performance, risks facing the industry, market conditions, capital structure, CRO industry dynamics, opportunities and overall strategic direction. In connection with this ongoing process, the board of directors has at various times considered potential business combination transactions.

In addition, from time to time over the last few years, several parties, including Carlyle and H&F, have approached the Company regarding possible strategic and investment transactions involving the Company. Prior to the discussions described in the following paragraphs below, representatives of Carlyle and the Company spoke on occasion, including meetings on January 12, 2009 and August 13, 2009, as well as a meeting on June 9, 2011 between Fredric N. Eshelman, Pharm. D., our Executive Chairman, and representatives of Carlyle in which Carlyle expressed an interest in acquiring the Company. Similarly, representatives of H&F and the Company spoke on certain occasions, including at meetings on April 27, 2009, August 25, 2009, November 19, 2009 and April 4, 2011 at which representatives of H&F had discussions with Dr. Eshelman regarding developments in the CRO industry and H&F’s interest in a potential transaction with the Company. However, none of these discussions between the Company and Carlyle or H&F, respectively, proceeded past preliminary conversations or involved any exchanges of confidential information.

On February 4, 2011, the Company announced the retirement, effective at the annual meeting of shareholders to be held on May 18, 2011, of Chief Executive Officer and director David Grange, and the commencement of a search for a new CEO. At the annual meeting, PPD’s shareholders elected the board’s slate of directors, including new directors, Vaughn D. Bryson, Robert A. Ingram and Ralph Snyderman, M.D. At the board meeting immediately following the shareholder meeting, the directors requested that Company management prepare a presentation addressing the business of the Company, risks facing the industry, the Company’s business plan and overall strategy.

On June 9, 2011, the Company’s lead independent director, Ernest Mario, Ph.D., was contacted by a private equity firm regarding a potential acquisition of the Company. The party indicated to Dr. Mario a price range of $33.00 to $34.00 per share and stated that it would require exclusivity to move forward with its interest in a transaction.

On June 28, 2011, the board held a special telephonic meeting to review the business of the Company, the risks facing the industry, the current global economic environment, the outlook for the pharmaceutical industry and research and development spending, the Company’s business plan, the Company’s recent financial and operating performance and share price performance and its prospects for future growth and share price appreciation. A representative of the Company’s legal counsel, Wyrick Robbins Yates & Ponton LLP, also attended this telephonic board meeting. The board discussed the recent inquiries received from parties interested in exploring an acquisition of the Company.

In light of the considerations and risks confronting the Company that were addressed in the Board’s review and the recent indications of interest received from various potential buyers of the Company, Drs. Eshelman and Mario recommended that the Company retain a financial advisor and explore whether interest existed among potential buyers for a transaction involving the sale of the Company, and how potential buyers would value the Company. The board discussed reasons for exploring a sale of the Company at this time, and the risks inherent in so doing, particularly the risk that competitors in the Company’s industry might use information about a potential transaction involving the Company to solicit the Company’s employees and customers, and the risk that a leak regarding a possible transaction could disrupt customer relations. The board also considered it likely that other industry participants would be either uninterested or lacking the capacity to acquire the Company.

The board was advised by the Company’s legal counsel about the potential inclusion of a “go shop” provision in any definitive agreement entered into with a particular bidder, which would permit the Company to continue to solicit acquisition proposals after the signing of the agreement. In light of the concerns discussed, and the board’s belief that a post-signing go-shop process would also be available if in fact other industry participants were interested, the board concluded that exploratory discussions should not include other companies in the Company’s industry, and that contacts should be made only with a limited number of financial sponsors at this time. The board determined that the party that contacted Dr. Mario on June 9, 2011 should not be included among the financial sponsors to be contacted at this time due to the value indicated by such party in its proposal to Dr. Mario and such party’s requirement that the Company negotiate with it on an exclusive basis.

Dr. Eshelman stated that he believed his interests in a transaction were aligned with the interests of shareholders, as he was a significant shareholder in the Company, and would sell all his stock in the transaction. Following further discussion, the board unanimously approved a two-to-four week exploratory process, focusing on private equity firms that were large enough to finance a transaction with the Company, had previously expressed an interest in the Company or had experience in the CRO sector and did not control competitive companies. The directors discussed several potential financial advisors, including Morgan Stanley & Co. LLC, considering their qualifications, experience and any potential conflicts of interest that could arise from representation of competitors or potential buyers. In addition, the Wyrick Robbins representative advised the directors of their duties to shareholders under applicable law in this context. Dr. Mario then updated the board on the status of the Company’s search for a new Chief Executive Officer. The board of directors discussed the candidates under consideration and the need to proceed with the search in case the exploratory process did not result in a sale of the Company.

Following the direction of the board, on July 1, 2011, the Company retained Morgan Stanley to act as its financial advisor, and to assist the Company in evaluating its strategic plan and capital structure, with a focus on unlocking value for shareholders. 

After the June 28, 2011 board meeting and continuing until early July 2011, the Company, directly or through Morgan Stanley, contacted four private equity firms that were identified as meeting the criteria established by the board, including Carlyle and H&F, to communicate a process for the potential submission of confidential preliminary indications of interest for an acquisition of 100% of the Company. During the week of July 5, 2011, all of the contacted private equity firms signed non-disclosure agreements. Once the non-disclosure agreements had been executed, the Company gave Carlyle, H&F and two other private equity firms (described in this proxy statement as Bidder C and Bidder D, respectively) access to limited Company confidential information via a virtual data room beginning on July 11, 2011. Later in the week, Bidder D contacted the Company to indicate that, due to its recent acquisition of another company, it was no longer interested in moving forward with the potential submission of an indication of interest to acquire the Company.

On Sunday, July 17, 2011, The Wall Street Journal published an article online, indicating that the Company was exploring a potential sale, including a potential combination with a competitor. Following the publication of the online article, the price of PPD’s common stock, which had closed at $27.86 per share on July 15, 2011, closed at $30.74 on July 18, 2011. The article caused a considerable number of customers and employees to express concern about the impact of the reported process on the Company’s operations. As a result, later on July 18, 2011, the Company issued a press release publicly disclosing that its board of directors had asked management to review PPD’s strategic plan and capital structure with a focus on unlocking value for shareholders, but that it was not pursuing a strategic combination with a competitor.

Also on July 18, 2011, members of the Company’s senior management conducted meetings at Morgan Stanley’s offices in New York City with Carlyle, H&F and Bidder C. In these meetings, the Company reviewed its business operations, historical financial performance and the Company’s five-year financial forecast prepared by the Company’s management for these meetings, which we refer to as the management presentation case.

Following the July 17, 2011 publication of the article in The Wall Street Journal and the Company’s press release on July 18, 2011, the Company was contacted, directly or through Morgan Stanley, by six other potentially interested parties, including a competitor to the Company, a private equity firm owning a competitor to the Company, a private equity firm with prior experience in the CRO industry and three other private equity firms. The private equity firm with sector experience was the only one of the additional potentially interested parties that met the board’s criteria. That private equity firm, or Bidder E, signed a non-disclosure agreement on July 20, 2011, which included provisions substantially similar to the terms included in the previously executed non-disclosure agreements. Shortly thereafter, Bidder E received access to the virtual data room and participated in a similar informational meeting with Company management via teleconference. The other five parties were not invited to participate in the process because they did not meet the criteria previously established by the board.

In addition to the management presentation case previously disclosed to the potential bidders, following consultation with the Company’s advisors, on or about July 20, 2011, Company management completed the preparation of a sensitivity case financial forecast, which we refer to as the management sensitivity case, to assist the board of directors in understanding and evaluating (i) the risks inherent in the management presentation case and (ii) the impact on the value of the Company in the event Company management is unable to achieve the financial forecast in the management presentation case. To achieve that objective, for the management sensitivity case, Company management reduced the projected revenue growth rates in the Company’s clinical development segment by two percentage points for each year of the five-year financial forecast, reduced the gross profit rates for the clinical development segment to 50% for each year of the five-year financial forecast, maintained SG&A spending levels in the clinical development segment consistent with the management presentation case, and reduced revenue growth rates for selected laboratory businesses (but maintained the gross profit and SG&A rates for those laboratories). The management sensitivity case was not shared with Carlyle, H&F or any other potential bidders for the Company.

On July 21, 2011, Morgan Stanley requested in writing that the four potential buyers (Carlyle, H&F, Bidder C and Bidder E) submit to the Company a preliminary, non-binding indication of interest on July 25, 2011, including a proposed per share purchase price.

On July 25, 2011, Bidder C informed Morgan Stanley that it would not be submitting an indication of interest. H&F and Bidder E submitted indications of interest on July 25, 2011; after seeking a one-day extension, Carlyle submitted an indication of interest on July 26, 2011. In its indication of interest, Carlyle proposed to acquire the Company at $37.25 per outstanding share of our common stock. The other indications of interest included a range of $33.00 to $36.00 per share from H&F, and a price per share of $36.00 from Bidder E. Each of the indications of interest indicated that the proposal was subject to certain assumptions, including negotiation of satisfactory definitive documentation, completion of due diligence and obtaining committed debt financing.

On July 28, 2011, the board of directors held a meeting in Durham, North Carolina, attended by members of the Company’s senior management team and representatives of Morgan Stanley and Wyrick Robbins. Dr. Eshelman, Chief Operating Officer William J. Sharbaugh and Chief Financial Officer Daniel G. Darazsdi reviewed in detail the management presentation case that had been shared with the four potential buyers that previously had met with the Company’s management. The board was also presented with the management sensitivity case to provide the board with a more detailed perspective on the risks in the management presentation case, potential results in light of these risks and the assumptions included in the management presentation case and the impact on the value of the Company if the management presentation case is not achieved. Morgan Stanley updated the board of directors regarding certain terms of the indications of interest received on July 25, 2011 and July 26, 2011 from Carlyle, H&F and Bidder E, including the indicative price per share and related assumptions, terms and conditions. Morgan Stanley also provided the board of directors with information about Bidders C and D, which were the two other parties that had been in contact with the Company but had declined to submit indications of interest. Morgan Stanley and the board of directors also discussed the other indications of potential interest received from other parties after the July 17, 2011 publication of the article in The Wall Street Journal and the Company’s press release on July 18, 2011, and the fact that these parties did not meet the criteria that the board previously had established. 

At the prior request of the board of directors, the Morgan Stanley representatives presented Morgan Stanley’s preliminary views on the value of the Company on a stand-alone public company basis, based on publicly available information and the Company’s management presentation case and management sensitivity case. The Morgan Stanley representatives also described for the board of directors stand-alone value creation alternatives, including a leveraged recapitalization or similar transaction while remaining an independent public company, and the potential costs and risks associated with the alternatives discussed in view of market developments and conditions. The Morgan Stanley representatives, the Company’s management and the board of directors discussed these alternatives and potential financing costs and debt capacity in light of recent trends in the CRO industry and the economy generally, as well as potential execution risks inherent in implementing the alternatives. The Morgan Stanley and Wyrick Robbins representatives then described for the board of directors the potential timing and process if the board determined to pursue a sale of the Company. In executive session with directors only, the board continued its detailed discussion and consideration of the merits and risks of the strategic alternatives available to PPD.

After extensive consideration of the strategic alternatives available to the Company, the board of directors directed the Company’s management and Morgan Stanley to continue exploring the potential sale of the Company and to seek a higher price from Carlyle, which was the highest bidder. Representatives of Morgan Stanley and the Company negotiated with Carlyle over the next few days, and following such negotiations, on July 31, 2011, Carlyle communicated that it would increase its July 26, 2011 indication of interest to $37.50 per share if the Company would agree to deal exclusively with Carlyle with respect to negotiation of any potential change of control transaction. During this period, each of H&F and Bidder E continued to contact Morgan Stanley to pursue discussions regarding their respective indications of interest.

The board met via telephone on the morning of August 1, 2011, and deliberated further on the Company’s alternatives and the revised Carlyle indication of interest. Senior management of the Company and representatives of Morgan Stanley and Wyrick Robbins also participated in the meeting. Dr. Eshelman updated the board of directors on negotiations with Carlyle and the most recent proposal from Carlyle, including the request for an exclusive negotiating period. Representatives of Morgan Stanley described for the directors the discussions that Morgan Stanley had with H&F, including that H&F had proposed a price range that was lower than Carlyle’s indicated price and was conditioned upon satisfactory diligence supporting certain assumptions used by it in determining that price range. Representatives of Morgan Stanley also described for the directors the discussions that Morgan Stanley had with Bidder E, including that Bidder E had not conducted a thorough diligence review and had presented a lower price in its indication of interest.

Representatives of Morgan Stanley informed the board of directors that each of those potential buyers had indicated that it was unlikely at that time that it would be willing to increase the price from its previously delivered indication of interest. The board of directors discussed the risks to the Company if it were to engage in discussions with competitors in the industry regarding a potential transaction, and determined that it was not in the best interests of the Company’s shareholders to approach a broader group of potential buyers at this time. However, the board also discussed that a mechanism should be considered to allow competitors in the industry or other potential buyers to submit proposals if any transaction were to be announced by the Company.

After careful deliberation, the board directed management and Morgan Stanley to inform Carlyle that the Company would verbally agree in principle that for the subsequent four weeks it would negotiate only with Carlyle regarding a potential change of control transaction, provided that any definitive agreement would include an appropriate “go shop” provision allowing the Company to seek and accept superior offers after execution of the agreement. In addition, the board determined that the Company would consent to Carlyle’s request to work with a small number of potential equity partners (which did not include H&F or Bidder E) identified by Carlyle and to Carlyle sharing Company confidential information with the potential debt financing sources and equity partners identified by Carlyle subject to non-disclosure obligations.

Also at the meeting, in order to provide additional perspective for the board to consider in connection with its analysis of any potential transaction, the board directed management to retain an additional investment bank or financial advisor to conduct analyses and, if possible, render an opinion to the board as to the fairness, from a financial point of view, to the holders of Company common stock of the merger consideration to be paid to those holders in any transaction, for a fixed fee payable upon delivery of the opinion and not contingent upon closing of a transaction.

Following the meeting, representatives of Morgan Stanley conveyed the decision of the board of directors to Carlyle, the Company invited Carlyle to conduct detailed due diligence in support of its pricing for a potential acquisition of the Company and indicated to Carlyle that Wyrick Robbins would prepare and provide a draft merger agreement that would include a “go shop” provision.

Later on August 1, H&F sent the Company a revised indication of interest at a range of $36.00 to $38.00 per share, contingent upon satisfactory diligence that supported certain assumptions used by it in determining the increased range.

The board of directors reconvened via telephone on the morning of August 2, 2011, with senior management of the Company and representatives of Morgan Stanley and Wyrick Robbins to consider the revised indication of interest from H&F. The board of directors discussed the facts that 75% of the expressed range did not exceed the Carlyle fixed price, that the range had increased significantly without analysis of any new information and was conditioned upon specific further diligence assumptions, that the Company had, prior to receiving H&F’s revised indication of interest, committed to deal exclusively with Carlyle for the next four weeks and that an appropriate “go shop” provision in any definitive agreement with Carlyle would afford adequate opportunity for any potential buyer, including H&F, to acquire the Company if it were willing to do so on terms that were superior to the terms offered by Carlyle.

After due deliberation, the board of directors directed senior management of the Company and Morgan Stanley to negotiate exclusively with Carlyle for the next four weeks and to seek the best terms available from Carlyle. Based on guidance given by the board, Morgan Stanley informed each of H&F and Bidder E that the Company intended to negotiate a transaction with another party at this time.

On August 2, 2011, the board of directors received a letter from the competitor of the Company that had contacted the Company after publication of the article in The Wall Street Journal, indicating an interest in acquiring the company within a price range of $34.00 to $38.00 per share, based on publicly available information. At the direction of the board, Morgan Stanley advised the competitor that it did not meet the criteria established by the board for participation in the sale process at that time.

On August 4, 2011, Wyrick Robbins sent to Latham & Watkins, counsel to Carlyle, the draft merger agreement requested by the board, which included a 40 calendar day “go shop” period, a right of the Company to terminate the agreement to accept a superior proposal if it paid a termination fee (which would be a lower amount if the agreement was with a party identified during the “go shop” period) and a termination fee to be paid to the Company if Carlyle failed to complete the merger in certain circumstances. In addition, during the first three weeks of August, Carlyle and its advisors continued their due diligence review of the Company, including through meetings, visits to certain Company facilities, teleconferences and access to additional information via the Company’s virtual data room.

On August 15, 2011, Bloomberg published an article stating that the Company, possibly advised by Morgan Stanley, was in exclusive talks with Carlyle regarding a sale of the Company after submitting an offer that was higher than bids submitted by other private equity firms, which were reported to range from $33.00 to $38.00 per share. Spokespeople for PPD, Morgan Stanley and Carlyle declined to comment for or about the article. The Company again experienced considerable employee and customer concern about the future of the Company. After closing at $26.60 per share on Friday, August 12, 2011, the Company’s stock price rose to as high as $33.07 on August 16 after publication of the Bloomberg article.

As directed by the board of directors at the August 1, 2011 meeting, after interviewing several firms, on August 17, 2011, the Company retained Lazard Frères & Co., LLC to conduct analyses and, if possible, render a fairness opinion to the board of directors. The terms of the Company’s engagement of Lazard, and the opinion rendered by Lazard to the board of directors with respect to the fairness from a financial point of view of the merger consideration to be paid to the Company shareholders, are described below under “Opinions of the Company’s Financial Advisors”.

On August 19, 2011, Latham & Watkins, on behalf of Carlyle, submitted to Wyrick Robbins, on behalf of the Company, a mark-up of the draft merger agreement, which included, among other revisions, requirements that PPD settle its ongoing accelerated share repurchase program and repatriate cash from foreign subsidiaries prior to closing at PPD’s cost, a shorter “go shop” period, a higher break-up fee payable by PPD if PPD failed to complete the merger in certain circumstances and a lower termination fee if Parent failed to close in certain circumstances. Over the next approximately three weeks, the parties negotiated the terms of the definitive merger agreement.

The period from July 15, 2011, which was the last trading day prior to the publication of the article in The Wall Street Journal, through the end of August 29, 2011, which was the date on which Carlyle indicated it could pay only $34.00 per share as discussed below, was marked by a high level of market volatility, with the S&P 500 equity index declining by 8% and an index comprised of certain publicly traded CRO companies declining by 18%. In addition, markets were impacted by several significant macroeconomic events, including concerns over the raising of the U.S. debt ceiling, the downgrading of the U.S. credit rating and concerns over European sovereign debt and bank stability.

On August 25, 2011, representatives of Carlyle had a telephonic discussion with representatives of Morgan Stanley and indicated that Carlyle was having difficulty arranging financing for the merger and that Carlyle was no longer willing to pay $37.50 per share of the Company. Carlyle did not communicate a new price on the call and indicated that it would not be in a position to do so until the following week. On August 26, 2011 representatives of Carlyle told representatives of the Company and Morgan Stanley that one of Carlyle’s potential equity partners had indicated it would not pay more than $33.00 per share, that a second potential equity partner was unable to act on the transaction in the short time frame available, and that Carlyle needed an additional one-to-two weeks to permit Carlyle to work with another potential equity partner.

On August 29, 2011, representatives of Carlyle told representatives of the Company that Carlyle had arranged for its debt financing and was prepared to pay $34.00 per share, but needed until September 12 to arrange for a commitment from another potential equity partner. Carlyle cited current stock and debt market conditions, which had deteriorated significantly since the beginning of discussions, as well as its inability to fully use PPD cash to fund a portion of the purchase price, including because of restrictions on repatriation of off-shore funds, potential costs to unwind PPD’s ongoing accelerated share repurchase program and the Company’s pre-existing commitments to invest in various venture and similar funds. In subsequent conversations with representatives of Morgan Stanley, Carlyle indicated that it likely could improve upon its offer, possibly to the level of $35.00 per share. In connection with its efforts to find a potential equity partner in the transaction, Carlyle requested permission to contact H&F, which Carlyle believed had both the financial capability and interest in the CRO industry to be a suitable equity partner.

On August 30, 2011, the board of directors held a meeting in Cary, North Carolina, which was attended by members of the Company’s senior management team and representatives of Morgan Stanley, Lazard and Wyrick Robbins and representatives of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel engaged by the Company on August 22, 2011 to provide additional strategic transaction advice and analyze foreign antitrust matters and prepare related filings. The Morgan Stanley representatives updated the board of directors on recent developments in the negotiations with Carlyle. The Morgan Stanley representatives also described for the board of directors general conditions in the stock and debt markets, noting the significant volatility and downward market trends in the last month.

The Morgan Stanley representatives then reviewed Carlyle’s latest proposal and Morgan Stanley’s views on potential equity partners to support an offer by Carlyle. Representatives of Morgan Stanley also gave their views on the ability of other financial sponsors to arrange the equity and debt financing for a transaction of this size. The Morgan Stanley representatives also described certain alternatives for unlocking shareholder value, including a potential leveraged recapitalization and other independent strategies the Company could pursue. The Lazard representatives then responded to questions from various directors. Representatives of Morgan Stanley expressed the view that all of the potential buyers that had previously submitted indications of interest would likely face the same financing challenges that Carlyle had indicated it was encountering. Morgan Stanley also expressed the view that H&F continued to express interest in a transaction with the Company, but like Carlyle, was unlikely to proceed with a transaction without participation of another significant equity partner. In light of recent economic changes, the board of directors requested an update from management of the Company on the business of the Company, the performance of the Company and the risks facing the Company.

After a presentation from senior management of the Company addressing these topics, the board of directors discussed with senior management of the Company the assumptions inherent in the Company’s business plan, the likelihood that the Company could achieve its business plan and the related risks, particularly in light of recent global economic developments including the downgrade of U.S. debt and concerns over European sovereign debt defaults. The Wyrick Robbins and Skadden Arps representatives advised the directors as to their duties in the context of this discussion and review. The board continued its deliberations in executive session without management or advisors present. Following discussions in executive session, the board of directors directed Dr. Eshelman to contact H&F to confirm its interest in a transaction and its ability to complete its diligence review on an expedited timeframe, and to communicate that the Company would consider a joint proposal from Carlyle and H&F, if the price were not less than $35.00 per share. Dr. Eshelman and representatives of Morgan Stanley contacted representatives of Carlyle and H&F and communicated that the board of directors would allow Carlyle and H&F to work together on the proposed transaction, and was prepared to consider a transaction if the price were at least $35.00 per share and the transaction could be signed and announced on September 12, 2011. The representatives of Carlyle and H&F indicated that they were prepared to work towards delivering a joint proposal to the Company.

During the period from September 1 through September 12, 2011, Carlyle and H&F and their advisors conducted a further due diligence review of the Company. Also during that period, negotiations of the detailed terms and conditions contained in the definitive merger agreement continued.

On the evening of September 12, 2011, representatives of H&F called representatives of Morgan Stanley to indicate that H&F had not yet been able to conclude its financial analyses or determine what price it would be willing to pay to purchase PPD’s stock. Carlyle and H&F both stated they remained interested in pursuing a transaction, but H&F required at least 7-10 additional days to finalize its analyses. At its regularly scheduled meeting in Cary, North Carolina on September 13, 2011, the PPD board received updates and advice from representatives of Morgan Stanley, Wyrick Robbins and Skadden Arps, as well as from senior management of the Company. Representatives of Morgan Stanley described for the board the H&F request for additional time to complete its due diligence, and Morgan Stanley’s views on other potential equity partners that might be interested in acquiring the Company together with Carlyle 

Representatives of Morgan Stanley suggested that Bidder E, which had originally submitted an indication of interest at $36.00 per share might have the financial resources to join with Carlyle in an offer for the Company. Representatives of Morgan Stanley also updated the board on the continued weak conditions in the capital markets, and management and the board discussed the effect such conditions could potentially have on the Company’s business. The board directed management and Morgan Stanley to approach Bidder E to determine if it would be interested in conducting due diligence to support a joint proposal for the Company with Carlyle at a price per share of $35.00 or more. The board also authorized continued discussions with Carlyle and H&F, and instructed the Company’s management to facilitate the additional due diligence requests of H&F. The board also discussed the need for the Company to move forward with its business plan, and in particular the desirability of appointing a Chief Executive Officer to fill the vacancy created by the retirement of David Grange in May 2011. The board unanimously approved the hiring of Raymond H. Hill as the Company’s new Chief Executive Officer, and appointed Mr. Hill to the board, both effective September 16, 2011. Due to the fact that the Company was engaged in discussions regarding a potential transaction with Carlyle and H&F that, if agreed, would be completed so soon after Mr. Hill’s hiring, Mr. Hill and the Company agreed that his equity awards received upon hiring would not be entitled to participate in the merger consideration.

On September 13, 2011, as directed by the board, representatives of Morgan Stanley contacted Bidder E to determine if it would be interested in conducting due diligence that would support a joint proposal for the Company with Carlyle at a price per share of $35.00 or more. On or about September 16, 2011, Bidder E contacted Morgan Stanley and indicated that it was not interested in submitting a joint proposal for the Company with Carlyle on the terms outlined by Morgan Stanley.

From September 16, 2011 to September 26, 2011, representatives of the Company and Morgan Stanley continued detailed discussions with H&F and Carlyle. In addition, during that period Wyrick Robbins and Latham & Watkins continued to negotiate provisions of the merger agreement.

On the evening of September 26, 2011, representatives of Carlyle and H&F called Morgan Stanley and stated that they were prepared to proceed with a transaction in which Carlyle and H&F would pay $33.00 per share of PPD common stock. On September 27, 2011, Carlyle and H&F delivered the proposal in writing along with a revised draft merger agreement that Carlyle and H&F indicated they were prepared to sign and a draft of their debt financing commitments. Over the next day and a half, Dr. Mario exchanged emails and phone calls with David Rubenstein, a founder of Carlyle, in which Dr. Mario expressed the Company’s dissatisfaction with the price offered by Carlyle and H&F and requested that Carlyle and H&F increase the price they would pay for PPD shares.

Mr. Rubenstein responded that Carlyle and H&F would not consider any increase in the offer price until the board formally considered the offer and responded in writing. 

At a special telephonic meeting on September 28, 2011, Dr. Eshelman presented the Carlyle and H&F offer to the board, and Dr. Mario described for the board his recent communications with Mr. Rubenstein. The board reviewed the Carlyle and H&F offer and, in particular, the offer price of $33.00 per share. The board also discussed, and solicited the views of Morgan Stanley and Lazard on global economic conditions and the state of capital markets, and the effect of such conditions on the willingness of Carlyle and H&F to pay a price per share in excess of $33.00. The board also requested and received from management a business update, and the views of management with respect to the outlook for the Company’s business and prospects. The board then received further input and advice from Skadden Arps and Wyrick Robbins.

The board determined, after considering the views of management and its financial and legal advisors, to reject the proposal of Carlyle and H&F to acquire the Company at a price of $33.00 per share. The board instructed Drs. Eshelman and Mario to inform Carlyle and H&F that the board was rejecting the proposal. The board also discussed its willingness to consider an offer from Carlyle and H&F at a price higher than $33.00 per share. The board instructed Morgan Stanley and Dr. Mario to communicate to Carlyle and H&F that although the board was rejecting the offer of Carlyle and H&F to acquire the Company at $33.00 per share, the board remained willing to consider an offer if they increased the price to $34.00 per share. On September 29, 2011, the Company delivered to Carlyle and H&F a letter rejecting their offer to acquire the Company at $33.00 per share, and indicating the board’s willingness to consider an offer at a price of $34.00 per share. Dr. Mario communicated the same to Mr. Rubenstein. 

On September 30, 2011, Mr. Rubenstein called Dr. Mario and told him Carlyle and H&F would be willing to increase their offer to $33.25 per share, but not more. A special telephonic meeting of the board was convened that evening to consider the improved offer. At this meeting, Dr. Mario updated the board on his recent communications with Mr. Rubenstein, and Dr. Mario’s belief, based on such communications, that Carlyle and H&F would not agree to increase the price offered per share beyond $33.25. The board discussed the Carlyle and H&F offer, in light of market conditions and the challenges facing the CRO industry. The board also discussed CRO market valuations, and the sensitivity of the Company’s share price in a prolonged period of economic weakness and reduced research and development spending by pharmaceutical companies. The board solicited the views of the Morgan Stanley representatives with respect to the market valuations in the CRO industry and potential trading ranges for the Company’s shares if it were to pursue a strategy to remain an independent public company. A Wyrick Robbins attorney summarized the open points in the merger agreement, including the amount of the various termination fees and timing of the marketing period for the debt financing. After considerable discussion and deliberation, the board unanimously indicated it was in favor of proceeding with a sale of the Company to Carlyle and H&F at a price of $33.25 per share, subject to negotiation of the definitive agreement and receipt of fairness opinions from Morgan Stanley and Lazard.

Later in the evening of September 30, 2011, Dr. Mario contacted Mr. Rubenstein and informed him of the board’s decision. Over the next two days representatives of Wyrick Robbins and Latham & Watkins, as well as representatives of Morgan Stanley and Carlyle and H&F, negotiated the final terms of the definitive agreement, including the amounts of the termination fees and the terms of the marketing period with respect to debt financing required for the transaction.

On Sunday, October 2, 2011, the board reconvened the September 30, 2011 special telephonic meeting to review the final proposed terms of the merger. Members of Company senior management and representatives of Morgan Stanley, Lazard, Wyrick Robbins and Skadden Arps also attended this meeting. The Wyrick Robbins representative reviewed the material terms and conditions included in the definitive merger agreement as negotiated to date, as well as a potential timeline of closing conditions following execution of the agreement. Following this review, the board of directors engaged in detailed discussion and consideration of the terms of the proposed merger and conditions in the market.

Representatives of each of Morgan Stanley and Lazard made presentations to the board. Representatives of Lazard presented to the board Lazard’s financial analyses described below under “Opinions of the Company’s Financial Advisors,” and noted that, based on discussions with management of the Company regarding the risks underlying, and uncertainty of achieving, the management presentation case projections, Lazard gave greater weight to the management sensitivity case projections for purposes of its analyses. Lazard rendered its oral opinion to the board, later confirmed in writing, that as of the date of the opinion, and based upon and subject to the factors, procedures, assumptions, qualifications and limitations set forth in its opinion, the price per share of the Company common stock to be paid to the holders of the Company common stock (other than certain holders specified in Lazard’s written opinion) in the proposed merger was fair, from a financial point of view, to those shareholders. Representatives of Morgan Stanley then reviewed for the board the analyses they had used in connection with the preparation of their fairness opinion. The Morgan Stanley representatives informed the board that, based on discussions with Company management regarding the risks underlying the management presentation case and the uncertainty of achieving those projections, Morgan Stanley gave less weight to the management presentation case projections and more weight to the management sensitivity case projections.

Morgan Stanley rendered its oral opinion, which was confirmed in writing, to the board of directors that, as of that date, and based upon and subject to the assumptions made, matters considered and qualifications and limitations on the scope of review undertaken by Morgan Stanley as set forth in its opinion, the $33.25 per share cash consideration to be received by the holders of shares of the Company common stock pursuant to the merger agreement was fair from a financial point of view to such holders. Each of Morgan Stanley and Lazard subsequently delivered its written opinion, dated October 2, 2011, to the board of directors confirming its oral opinion. The full text of the written opinions of Morgan Stanley and of Lazard, each of which sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken by each in rendering its opinion, are attached as Annexes B-1 and B-2 to this proxy statement, and are described in more detail below under “Opinions of Financial Advisors”.

Click here to see the rest of the PPD merger background information.

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