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Gilead (GILD)
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Biotech firm Gilead stated Thursday that they would be buying up CV Therapeutics for $1.4 billion, becoming the next firm in the health industry to announce a M&A agreement. The Foster City-based company said they would acquire the smaller biopharmaceutical company in an all-cash offer of $20 per share. However, shares of the target company were trading slightly over $20 in early morning trading, a level unseen since early 2006. It seems like the deal is all but set in stone, what with Gilead agreeing to pay and CV accepting the offer. Therefore, why is its stock selling at a higher price than the agreed upon deal?
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This is because investors believe the bid could go higher. Is this a plausible belief? The answer is probably not. However, consider the events leading up to today's announcement. In January, Astellas Pharma made a $1 billion (or $16 per share) offer for the firm. The company subsequently rejected this because management felt it undervalued the business. Since then, there has not been another bid made by the Japanese health company. It has also not responded with remarks about this acquisition. This deal also comes following two large deals in the industry. Genentech (DNA: Charts, News, Offers) finally agreed to be acquired by Roche for $44.6 billion where the Swiss drug manufacturer would purchase the shares it does not already own. In addition, Merck (MRK: Charts, News, Offers) announced a deal with Schering-Plough for $32.6 billion that would leave the latter company mostly intact but adopt Merck as the company name. True, there is potential that a different third party could step in and offer more for the Palo-Alto-based firm, but that is extremely unlikely because it would probably have many legal repercussions.
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There is also the possibility that Gilead will think $1.3 billion is too expensive and back out, leaving the firm exposed to other suitors now that it has been made public that CV is open to a M&A arrangement. However, this is extremely unlikely because Gilead is seeking to expand its offerings in cardiovascular treatment. Furthermore, CEO John Martin was quoted saying in the Wall Street Journal, "The acquisition of CV Therapeutics represents a unique opportunity to complement and strengthen our growing cardiovascular portfolio." From this, it can be extrapolated that the company does not expect to back out now or later.
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The company expects this deal to add to earnings around late-2010 or 2011. It is also expected to dilute earnings for 2009 and maybe slightly in early-2010. Seeing a positive return that soon is not impossible, but considering the target company only generated $154 million in 2008 for annual revenues, this might be wishful thinking. If annual revenues stay stagnant, it would take about 9-10 years to break-even. If employees are released in order to save on costs (of which there are about 500 individuals in question), incurred charges could add more to the bill.
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On the other hand, Gilead may be able to achieve better economies of scale due to its larger size. Its market cap is $40 billion after all (about 40 times that of CV before this morning's announcement). Furthermore, the revenues are not expected to remain stagnant. With research being done for diabetes and pulmonary diseases, it is possible that a return of $1 billion could be reached quickly. Why? A larger company may allocate more resources to researching products. More resources, plus more manpower to do testing, could mean developing products are pushed to market faster, thereby generating higher revenues. However, even if it were a ground-breaking drug, it may be difficult for the new products to increase cash flows by 3-6 times.
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With all things considered, it may take longer than 2 years to realize a positive return from this investment. In addition, investors should not expect spikes in the bid for CV, but rather, for Gilead to close this deal fairly soon so the company can begin realizing revenues from the acquisition as soon as possible.
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