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Illumina's "Poison Pill" Against Roche's Hostile Takeover Might Drive the Share Price Much Higher

Illumnia (ILMN) is a company focusing on developing and manufacturing life science tools and integrated systems for the analysis of genetic variation and function. It provides a line of genetic analysis solutions, with products and services for a range of interconnected markets including sequencing, genotyping, gene expression and molecular diagnostics. Just two days ago, ILMN received an offer of up to $5.7 billion, meaning $44.5 per share in cash in a hostile bid to take over the company by Swiss drug maker Roche Holding AG (RHHBY).

However, investors around the world think that the U.S. gene company will command much higher than the offering price. That is why shares of ILMN advanced significantly, from $37.7 to $55.15 within a day, realizing a gain of more than 46%, and is now dropping a little bit to $53.4 per share. At this price of $53.4, the market would value the whole company at $6.5 billion, 14% more than the offer made by Roche. It is said that gene sequencing is central to the medicine’s future because it would allow researchers and physicians to know better each type of patients’ response to each particular drug. The products made by ILMN might fit nicely in Roche’s portfolio of cancer drugs, especially the diagnostic test to determine the best fit for the patients. Deutsche Bank analyst Ross Muken commented: “The market is clearly pricing in here a very high probability of a deal being done at $55 to $60. The real question becomes whether or not we see another bidder, and that will determine how aggressive Roche needs to become in terms of follow-up bids.” The potential bidders for the company might be Siemens Healthcare (SI), General Electric (GE), Johnson and Johnson (JNJ) and Abbott Laboratories (ABT).

Currently, Roche has already owned a small number of ILMN’s share, but it plans to start a tender offer because ILMN was not willing to talk. “Roche has made multiple efforts to engage with Illumina in order to reach a negotiated transaction, but Illumnia has been unwilling to participate in substantive discussions.” Roche has been quite aggressive in acquiring biotech targets, including buying remaining stake in Genentech for around $47 billion in 2009.

Peter Lawson from Mizuho Securities said: ”It does feel like it’s Roche’s initial bid at only 15% premium to yesterday’s close. They kind of play this game of sitting around for a while on the bid.” He expected the final price would stay in the range of $60-$80 per share. However, at the current price of the market, ILMN is being valued at nearly 71x earnings, 6.5x book value and 24.2x its operating cash flow, a little bit relatively more expensive than its five-year historical valuation.

Historically, ILMN share prices have been on a roller coaster, after gradually increasing from only $4 in 2005, up to $76 in July 2011. Then it experienced a free fall, dropping to $27 in the next three months. Actually this is the third time that Roche has targeted ILMN for acquisition, and this time Roche jumped back into the game after the market correction. The rumor for this time has dated back to the end of December last year, which pushed the stock up quite substantially as well.

In response to the offer of Roche, ILMN adopted a poison pill by implementing a “shareholders' rights plan,” along with the argument that Roche’s bid was an “opportunistic” price because the company is developing genetic sequencing machinery which might tap a growing use in personal cancer treatment therapies. Under the poison pill, ILMN could give out one preferred stock purchase right as a dividend to all shareholders if buyers can accumulate 15% of the company’s stock, diluting the worth of this hostile bid. Maxim Group analyst Bryan Brokmeier thinks that by adopting the position poison pill, Roche would have to offer more money for the acquisition. He rates the company as a “buy” with the price target of $53. The poison pill against the hostile takeover might cause a bidding war and it might eventually drive the price of ILMN to higher levels in the next several months.

Disclosure: No position.

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

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