Roche Makes a $5.7 Billion Hostile Bid for Illumina (ILMN)
This week, Swiss pharmaceutical giant Roche launched a hostile bid for San Diego-based Illumina (ILMN: Charts, News), the market leader in gene sequencing technology, for $5.7 billion, or $44.50 per share. Roche has given Illumina ten days to respond. While shares of Illumina have soared over 40% since the announcement, analysts believe that Roche will run into major resistance from Illumina as well as regulators, dragging the battle deep into 2012.
Despite the jump in Illumina's share price to the mid $50s, Roche has stated that it has no intention to raise its initial offer, though investors believe otherwise. Market watchers also believe that if Roche is successful, its combined dominance of the gene sequencing field could attract antitrust regulators, who have been keeping a close eye on the pharmaceuticals industry. Daily Chart
Both companies have repeatedly used mergers and acquisitions in the past four years, taking advantage of depressed share prices in volatile markets. Roche took over tissue diagnostics company Ventana in 2008 and acquired biotech giant Genentech in 2009. Meanwhile, Illumina acquired genetic analysis start-up Helixis in 2010 and Epicentre Technologies, the creator of next-generation gene sequencing technologies, in 2011. These acquisitions have made Illumina the leading developer and manufacturer of life science tools and systems for genetic analysis. However, Illumina is dependent on government funded research laboratories for 80% of its annual revenue, and its technology is used in limited capacity, primarily in the study of malignant tumors and prenatal diagnostics. Meanwhile, Roche believes that the future of genetic sequencing lies in clinical diagnostics, which can be used to create a new generation of pharmaceutical products that can target specific genes. In other words, Roche is trying to shift DNA research from the lab to the clinic. Illumina investors believe that based on Roche's acquisition history, the final offer will be far more than $44.50 per share, which is equivalent to 5 times the company's forecast enterprise value over sales for 2012. When Roche finalized its 2008 takeover of Ventana, it was forced to increase its offer to 8 times enterprise value over sales, at $89.50 per share, up from its original offer of $75. It's clear that Illumina investors are expecting more of the same, especially since analysts had valued the company at $80 per share last July, prior to the summer crash of 2011. Cown & Co. analyst Doug Schenkel supported that view, stating, "History suggests that they will probably go higher here." However, the deal is forecast to drag out for several months, with Roche claiming that a deal would be finalized at Illumina's annual meeting in May. Illumina does not currently have a poison pill or shareholder rights plan, the two common defenses against hostile takeovers. However, the company has a staggered board of directors, which will make it hard for Roche to replace more than four of Illumina's current directors in the coming year. Illumina management has declined to comment regarding its defense strategy. There is also speculation that the Roche's bid may attract other buyers into a bidding war. Possible bidders include General Electric (GE
), which has recently increased its footprint in healthcare, Thermo Fisher Scientific (TMO
) and Johnson & Johnson (JNJ
), among others. But analysts believe that few would be as serious as Roche, which has seen its own gene sequencing technology fall far behind the curve of specialized companies such as Illumina and Life Technologies (LIFE
). Zarak Khurshid, an analyst at Wedbush Securities, stated, "Another bidder would be a low probability event." Investors looking to jump on the bandwagon for an easy gain should be wary, however. Shares of Illumina are already valued at 20% over Roche's original offer, and now trade at 39 times forward earnings, and will now be completely dictated by the progress of acquisition talks. Other News About ILMN Roche, Illumina hunker down for takeover battle
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Published on Jan 27, 2012
By Leo Sun