April 18Roche might be better off dropping its $6.80 billion bid for genomics specialist Illumina and coming back a year later, as its legacy of paying up after protracted takeovers has damaged its bargaining power, some bankers believe.
Illumina, which started branding itself "the Apple of the genomics business" following Roche's approach, has rejected an improved $51 a share offer from Roche and urged investors to vote against its attempt to appoint new board directors at a meeting on Wednesday.
Illumina is relying on better-than-expected first-quarter results to secure shareholders' backing for its refusal to engage with Roche.
Roche's hints that it could raise its bid again if it saw Illumina's numbers were seen as a clumsy move by several bankers as it strengthened shareholders' view that they could get an even better price.
"Roche's strategy is falling down as they telegraphed too much that they could pay more," said a banker closely following the deal but not involved in the talks.
"They know that they would have to pay up if they want a deal now," the banker added.
Chief Executive Severin Schwan warned that Roche would have to consider "all its options" if Illumina shareholders voted against its proposals at that meeting.
Roche has built up a reputation as a tough and disciplined consolidator after protracted takeover battles for Ventana and Genentech. But in both cases, the pattern was to exhaust shareholders and strike a deal with a last-minute sweetener, bankers said.
Such a track record could encourage Illumina to push harder for a better price and ignore the risk of losing out on a takeover premium altogether, even after its share price plummeted by 23 percent in October after disappointing results.
"It is unfortunate that they had to increase the price several times, which could cost Roche credibility in future deals. One will no longer believe that their initial offers will not be increased," said a second banker closely following the situation but not involved.
Illumina is however expected to plunge to a $38-42 standalone value if Roche walks away, hedge fund investors and bankers said.
They also don't anticipate Illumina's fundamentals will radically change in the the next 6 to 12 months.
Roche's approach has also illustrated that there are no rival bidders for Illumina, which means that the Swiss bidder would have little to lose if it dropped its bid and came back at a later stage.
"It would be surprising if they walked right now," said the first banker pointing to Roche's usual conservative and slow-moving modus operandi.
"But it would be a big win for them in the long term. They could come back with the same price a year later and shareholders would probably think twice before snubbing it."
Illumina's recent downward trading is a sign that some hedge fund investors, who had bought Illumina shares hoping for a quick profit, are now starting to feel nervous that the deal might not go through.
It also makes it difficult for Roche to raise its bid again as the premium to Illumina's share price would start looking "silly", hedge fund investors said.
"They lost the battle. They had a unique opportunity to change the board and they wasted it," said a London-based hedge fund manager, refering to Roche's tactics.
Like many of its peers, this hedge fund investor cut its holding in Illumina straight after Roche's $51 a share improved bid, as it saw it as insufficient to win over long-term shareholders and change the board at Wednesday's general meeting.
Illumina is controlled by a handful of institutional funds that see $51 a share "as a joke", a U.S.-based hedge fund manager said.
Most of them were emboldened by Roche's interest in the company and see $60 as the minimum price for their shares, hedge fund investors said.
Second-largest shareholder Baillie Gifford and JP Morgan Asset Management are believed to have the highest price expectations - betweeen $70 and $80 a share - due to the price they paid for their shares, the same hedge fund manager said.
It is not clear how top shareholder Capital Research, which owns around 11 percent of Illumina's stock, will position itself, recent investors said.