Roche and Illumina Ready the Trenches

After its high profile acquisition of Genentech in 2009, Roche is back in the M&A spotlight again. This time, the Swiss pharma giant has its eyes on the DNA sequencing company Illumina, which is based in San Diego in the US. However, both companies are digging their trenches in preparation for a potentially lengthy battle.

At the end of January, Roche made the first move by offering to acquire all the shares of Illumina for $44.50 per share. The offer represents a premium of 64% over Illumina’s closing stock price on 21 December 2011 (before rumours of the possible transaction began to emerge). According to a statement, Roche wants to combine its existing Applied Science business with Illumina and move the business area’s headquarters to San Diego, a move that Roche believes will be attractive to Illumina’s management and employees.

But last week Illumina has deemed the offer as “grossly inadequate”, “opportunistic” and “disadvantageous to Illumina’s stockholders”. In particular, Illumina believes that the offer has been timed to “capitalize on a recent share price dislocation”.

Even before Illumina responded to the offer, Roche seemed to have anticipated the rejection. In its own press release about the tender offer, Roche explained that it has tried to negotiate with Illumina, but the company had been “unwilling to participate in substantive discussions”. However, Roche also has a backup plan. The company is already a shareholder of Illumina, which gives it the right to nominate candidates to Illumina’s Board of Directors. Four spots on the board are about to be up for grabs as current directors reach the end of their term. Roche has nominated four of its own candidates to fill the spaces. In addition, the company has also proposed that the board be expanded from nine members to eleven. Roche will be nominating its own candidates to fill these seats too, which means that the majority of the board will comprise Roche-nominated directors - a move that Illumina has referred to as “board packing”.

But Illumina is not without its defences. The company has adopted a shareholder Rights Agreement, which is more commonly known as a “poison pill”. The poison pill allows shareholders other than the bidder to purchase more shares at a discount, which can force a higher bid. Although such a strategy can prevent a hostile takeover, it can also act as a deterrent to other potential bidders because the deal becomes too expensive.

The latest update in the situation has been for Roche to express its disappointment with Illumina’s decision to recommend that its shareholders do not tender their shares. However, the tender offer will be open until 24 February so whether shareholders will heed the recommendation remains to be seen.

In a statement, Severin Schwan, CEO of the Roche Group, added that they would prefer to enter into a negotiated transaction with Illumina and that the company is ready to commence discussions at any time.