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Illumina's Board Rejects 'Blatantly Opportunistic' Roche Bid

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This article has been updated from an earlier version posted on Feb. 8 to include comments from Roche executives and analysts from several investment firms.

Illumina's board of directors last week rejected Roche's unsolicited $5.7 billion bid to acquire the San Diego life science tool vendor, calling Roche's offer "inadequate" and urging its stockholders not to tender its shares.

In response, Roche said it was "disappointed" by the decision and that it remained open to negotiations. Several analysts predicted that the dialogue between the two firms over a possible business combination would continue.

Roche approached Illumina about a possible acquisition in November but was rebuffed by the firm's board. The Swiss diagnostics giant went public with its bid last month (BAN 1/31/2012), offering to buy shares of Illumina's stock for $44.50 and nominating its own slate of directors for election at Illumina's annual shareholder's meeting, which has not yet been scheduled, but was held in March and April in previous years.

In response, Illumina's board of directors last month commenced a review of Roche's offer which it this week flatly rejected.

"It is the board’s unanimous belief that Roche's offer dramatically undervalues Illumina and fails to reflect the value of the company’s unique leadership position and future growth prospects," said CEO Jay Flatley in a statement.

Illumina gave seven reasons for its rejection of Roche's offer in a filing with the US Securities and Exchange Commission. First, the company believes that Roche's offer is "grossly inadequate" and "does not reflect the underlying value of Illumina’s assets, operations and prospects, including its industry-leading position and growth opportunities."

Here, the company cited its "portfolio of nine platforms spanning next-generation sequencing, microarrays and related technologies, along with the associated consumables and informatics," which it claimed is "one of the strongest brands in the life sciences tool sector." Illumina also believes that it has "substantial growth opportunities" going forward, not only in research but molecular diagnostics.

Illumina also cited its "proven track record of performance," noting that it has achieved annual increases in revenue and earnings per share at compounded growth rates of approximately 42 percent and 26 percent, respectively, since 2006.

In the SEC filing, Illumina also called the timing of Roche's offer "blatantly opportunistic" and "disadvantageous to shareholders." According to Illumina, Roche timed its offer "opportunistically to capitalize on recent share price dislocation," approaching the firm in November at a moment when its stock price had declined to $40 from an all-time high of $79 in July 2011, and when it had experienced weaker than expected sales due to tepid state research funding in the US and abroad.

Illumina called its current condition "temporary" and believes that research funding will stabilize this year.

Other reasons for the rejection cited in Illumina's SEC filing were the Roche offering's failure to capture "Illumina's value as an enabler of personalized healthcare," and its use of "disadvantageous tactics" by offering to buy the firm at an inadequate price.

"The board believes that Roche acted to take advantage of Illumina's depressed stock price levels in its attempt to transfer the significant future value of Illumina from its stockholders to Roche and its stockholders," Illumina said. Illumina also noted that Roche's offer of $44.50 is now below the firm's trading price of $51.97 as of Feb. 6.

Illumina also charged that Roche's offer creates "significant uncertainty and risk" and that its financial advisors Goldman Sachs and Bank of America on Feb. 7 reported in their respective opinions that Roche's offer is "inadequate from a financial point of view."

Letter to Humer

Illumina also made public a letter it sent to Roche Chairman Franz Humer last week. In it, the firm rejected Roche's offer as being "not in the best interests" of Illumina stockholders and said that Illumina will "deliver value to our shareholders that is far superior to Roche's offer" as an independent company.

Illumina Chairman William Rastetter and Flatley signed the letter to Humer. They noted Roche's decision to "opportunistically time" its offer to a "temporary dislocation in our stock price." For "all of these reasons and more, your proposal fails to compensate our stockholders for the intrinsic and scarcity value associated with Illumina’s unmatched leadership position," they wrote.

Illumina also vowed to "vigorously resist Roche’s blatantly opportunistic attempt to acquire Illumina at a grossly inadequate price," the "only course of action" consistent with its "fiduciary responsibility to its shareholders."

In the letter, Illumina also commented on Roche's proposed slate of board nominees.

"We continue to believe that our highly qualified, independent directors are better positioned to act in our stockholders' interests than directors selected and compensated by you to advance your own strategic objectives at the expense of our stockholders," the firm wrote.

'Herr Roche, Your Serve'

Roche CEO Severin Schwan said in a statement last week that he was "disappointed" by the rejection of its offer by Illumina's board of directors, arguing that Illumina's board "refuses to engage in substantive discussions with Roche."

Roche stuck by its offer of $44.50 per share, which it called "full and fair value" for the stock. Schwan said that Roche still plans to nominate a slate of directors to Illumina's board at the shareholder meeting.

"It remains our preference to enter into a negotiated transaction with Illumina and we stand ready to commence discussions at any time," said Schwan.

Analysts for several investment firms last week said that they had expected Illumina to reject the offer, but believe the dialogue between Roche and Illumina over a possible deal will continue.

"Herr Roche, your serve," wrote RW Baird analyst Quintin Lai in a note. Lai said that he was "not surprised" by Illumina's rejection of Roche's offer, given the "cold shoulder that they gave Roche in the weeks leading up to the hostile bid."

Still, Lai said that the rejection "allows the process to move forward," noting that "what happens next is subject to more discussion and debate."

Credit Suisse analyst Vamil Divan wrote in a note that it was unlikely that other firms would attempt to outbid Roche for Illumina. There are "no obvious white nights ready to step in," Divan wrote. "Based on our discussions with [Credit Suisse] analysts who cover many of the companies mentioned as potential acquirers of Illumina, it appears unlikely that any of these companies would be willing to spend the money it would take to significantly improve on Roche’s $5.7 billion offer."

Divan mentioned that GE and Thermo Fisher Scientific have indicated that they are not likely to do large deals in the near-term, while others, such as Danaher, have stated a desire to focus on non-healthcare-related businesses for future deals.

Additionally, Divan wrote that for Roche, Illumina's technology is the "most logical strategic fit." Noting Roche's hostile bid for Ventana Medical Systems in 2008, in which Roche initially bid $3 billion but ended up paying $3.4 billion to acquire the company, Divan speculated that Roche will "be willing to let the process play out and increase its offer if necessary to obtain a company that Roche’s recent public commentary suggests that they highly covet."

Leerink Swann analyst Dan Leonard similarly predicted protracted negotiations between the two firms.

"We continue to doubt that [Illumina's] board would agree to an acquisition for anywhere near Roche's offer of $44.50 [per] share," Leonard wrote in a note this week, "but expect that the public negotiating process will be long and drawn out."

Credit Suisse's Divan predicted that there is an 80 percent chance Roche will acquire Illumina for $60 per share, and raised Credit Suisse's target price from $34 to $56 per share.

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