Eye products maker Advanced Medical Optics (AMO) has withdrawn its $75 per share bid for its rival Bausch & Lomb (B&L) after weeks of opposition from AMO's largest shareholder, compounded by a lukewarm reception from B&L itself. ValueAct Capital, which holds 14.7 per cent of AMO stock, opposed the B&L buyout proposal after it was announced in early July.

While some analysts say this clears the way for Warburg Pincus' $65 per share leveraged buyout bid for B&L, others think it is a mere tactical retreat, so that B&L shareholders will decisively vote out the Warburg bid. B&L closed down 2 per cent at $62.54 after the announcement, while AMO ended the day up 1 per cent at $30.55.

B&L had given AMO chief executive James V Mazzo and his team until 3rd August to show 'concrete, credible evidence' that enough Advanced Medical Optics shareholders would vote to approve the $75 a share takeover bid announced last month. Mazzo said the request was extraordinary and that the deadline was unrealistic.

In the meanwhile, merger talks had already been stalled in a dispute about what AMO could tell its shareholders about B&L. AMO complained that it was unable to drum up shareholder support, being bound by a nondisclosure agreement with B&L that prevented it from properly outlining the benefits of the merger. But B&L refused to give AMO more time to persuade its shareholders and declined to enter into any further merger negotiations.

One of the problems AMO faces in getting a majority of its shareholders to approve the transaction is that it would need new share issue to finance the deal, as well as to boost its leverage substantially. And AMO hasn't yet secured committed finance for the buyout, which could be difficult given the turbulent debt markets.

In May, AMO had to recall all of its bestselling Complete MoisturePlus contact lens solution because of a possible link to a serious eye infection. MoisturePlus accounted for about one-tenth of AMO's $1 billion in sales last year. Some analysts say that the company, which also acquired the IntraLase Corporation and WaveFront Sciences earlier this year, should concentrate on getting back in the black rather than on gobbling up a company with twice its sales volume.

Besides, B&L's hedge fund investors may be willing to settle for $65 a share rather than risk voting out the Warburg bid, because if that deal were rejected and AMO failed to generate the funding to close the deal, they could face huge losses. AMO has left the door open to a deal in its withdrawal letter, saying, "If, in the future, you decide to run a process that is designed to deliver value to your shareholders, please let us know." Some think that is an invitation to B&L shareholders to vote against the Warburg bid.