| April 18
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,
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
"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
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
Illumina is controlled by a handful of institutional funds
that see $51 a share "as a joke", a U.S.-based hedge fund
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.