NEW YORK, May 4 – Large Scale Biology and Illumina both adopted stockholder rights plans Friday, in a preemptive effort to head off hostile takeover attempts, the companies said.
The actions follow similar moves by several other companies in the last several weeks, and are “usually a clue that things are getting too cheap in the markets,” said Franklin Berger, an analyst with JP Morgan H&Q in New York.
Both companies, after completing successful initial public offerings last year, have significant amounts of cash, and companies in their position feel that their current stock price undervalues their technology and intellectual property, said Berger, making the company vulnerable to a potential hostile takeover.
The stockholder rights plans work by allowing current shareholders the right to buy additional stock in the company at an artificially low price, in the event a third party acquires more than a certain percentage of the company’s stock. The action in effect dilutes the stock, reducing the stake of the potential acquirer.
In the case of LSBC, the company had about $75 million in cash as of March 31, but is currently trading at $5 per share, giving a total market capitalization of about $123 million.
As a result, a potential acquirer could attempt a takeover by buying a large fraction of the company’s stock, and if successful, would have paid only $48 million for the company’s intellectual property, equipment, and other valuable assets, said Berger. LSBC has research collaborations with large agriculture businesses and has developed a Human Protein Index.
“The purpose of the stockholder rights plan is to protect the company against any takeover attempt that is not in the best interests of our stockholders, and to enable the Board of Directors to better evaluate any potential acquisition proposals," said Robert Erwin, CEO of LSBC, in a statement.
A spokesman for LSBC, based in Vacaville, Calif., was not immediately available for comment.
Illumina, based in San Diego, had about $115 million in cash as of March 31, and currently has a market capitalization of about $262 million. The company specializes in developing tools for studying genetic variation and function.
Under Illumina’s stockholder rights plan, current shareholders will have the option to buy stock cheaply if a third party acquires 15 percent of the company’s stock.
"The rights are intended to enable all stockholders to realize the long-term value of their investment in the company," Illumina said in a statement. "The rights will not prevent a takeover attempt, but should encourage anyone seeking to acquire the company to negotiate with the board prior to attempting a takeover."
“For a lot of these tools companies, they have a significant amount of cash after going public," said Lawrence Neibor, an analyst with Robert W. Baird in Milwaukee. “Companies such as Illumina use stockholder rights provisions as a way to make it much more difficult to buy stock on the cheap,” he said.
Neibor said that in general, under current market conditions tool makers like Illumina suffer because Wall Street takes a short-term view of their finances.
Rather than consider what the company may earn in three to five years' time, he said, the market wants to know about revenues next quarter.
“The market follows a glass half-full/half-empty [way of looking at things],” he said. “When the market sees the glass as half-empty, they’re going to want to know 'what are you going to earn next quarter?’ For a company like Illumina, that’s not good.”