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Genentech (DNA)
Will Shareholders Agree to Sell Genentech?
About six months ago, Swiss drugmaker Roche offered to buy out all of Genentech's remaining stock in a deal worth $44 billion. This equaled about $89 per share and represented a 9 percent premium. The board of directors evaluated this offer and about a month later, rejected the bid saying the price significantly undervalued the company's worth and growth potential. Little else has occurred since, but on Friday, Roche took the deal directly to shareholders asking to buy their equity stake for $86.50 per share. The US biotech firm advised shareholders not to take action so it can review its current position and prepare a formal response. Investors and analysts expect an announcement within a week or two. Last Friday, Genentech's stock closed at $81.50, indicating investors are complying. Having been rejected once by the company, will Roche be rejected a second time by shareholders?
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More than likely, yes. For one, the deal to shareholders is a mere 6 percent premium from Friday's closing price. Exactly one day after they formally rejected the proposal in August, Genentech shares reached their 52-week high of $99. This signals that investors agree with Genentech's decision that the deal was undervalued. With current market conditions, prices have since fallen to the low $80s. This is about the same as what it was trading for back in July when the buyout offer was originally made. But a public tender offer, even if it is rejected, is not necessarily a bad strategic move. By making an offer to shareholders, the biotech firm will be forced into going back to the negotiation table and coming up with a public reply. This can be either a counter offer or rejection of the pharmaceutical giant's proposal.
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Another reason why shareholders will reject this deal comes from the recent Pfizer (PFE: Charts, News, Offers) and Wyeth (WYE: Charts, News, Offers) deal. In that agreement, Pfizer would pay $33 plus 0.985 of its own shares for Wyeth's. At current market prices, the premium is about 20 percent. This is pretty close to historical premiums in this industry, which have reached as high as 25-30 percent. Extending that information to Genentech, Roche would probably have to offer as much as $100 or more per share in order to be taken seriously by the company or its shareholders. Will Roche pay this much for Genentech? It is possible. After all, the R&D portfolio at Roche has not yielded very many blockbuster drugs since valium. Furthermore, biotech firms have historically been more successful than pharmaceuticals.
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So what will Roche do if they can completely acquire Genentech? The company stated they would have the R&D division in San Francisco operate as a separate unit. However, the Nutley, New Jersey pharmaceutical operations would be relocated to the same campus as the other Genentech facilities in the area. For better or worse, this will cause some disruption. The current Nutley division operates with more of a business mindset, whereas the San Francisco campus focuses more on research and development. For Genentech, this will probably be negative. To shareholders, the company structure was fine, so telling shareholders that combining the operations to a single campus will not be enough to motivate them to sell.
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Regardless of what actions are taken, Roche has made it clear they want to own 100 percent of their subsidiary. If necessary, they can have a couple of investment banks value Genentech and buy up all of the remaining shares. This will probably be a last resort, and regardless of how much they really want to own Genentech, investors should follow news for guidance before making any sudden decisions to increase or decrease their stake. For prospective investors, now is the time to act. However, the minimal increase in the average volume of trades is an indication that it would be a good idea to wait on Genentech's official announcement before deciding on going long or not on the company's stock.
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