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Illumina Rejects Roche's 'Grossly Inadequate' $5.7B Takeover Bid

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This article, originally published Feb. 7, has been updated with information from Roche's response, Illumina's earnings call, and analyst comments.

Illumina's board of directors yesterday unanimously rejected Roche's unsolicited $5.7 billion acquisition bid, calling the offer "grossly inadequate."

"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 Illumina CEO Jay Flatley in a statement.

Late last month, Roche made a $5.7 billion hostile takeover bid for Illumina in order to bolster its clinical sequencing capabilities following unsuccessful discussions with the company (IS 1/31/2012).

Illumina this week highlighted seven major points for rejecting the offer. In addition to calling it inadequate, the board deemed it "opportunistic" and "disadvantageous to Illumina's stockholders," and said that it failed to reflect Illumina's value in personalized healthcare.

Illumina estimated that it holds a 60 percent share of the next-generation sequencing market and that approximately 90 percent of the world's sequencing output is produced on Illumina instruments.

The board wrote that it believes Illumina has a proven track record and a significant product pipeline, such as the planned HiSeq 2500 and MiSeq enhancements, and that it is "on the verge of benefitting from its continuous significant investment in novel platforms."

On a conference call this week to discuss fourth-quarter and full-year earnings, Flatley said that Illumina's track record is "rare in the industry" and will "continue to create value" for the company's stockholders.

Additionally, while Flatley called the offer inadequate, he would not speculate on what an adequate offer would be.

Since news of the bid, Flatley said it has been "business as usual" both among the company's employees and with the company's customers. In some ways, the news has been "a catalyst for our team to make sure we continue to deliver," he said.

It cited its partnerships with molecular diagnostic companies such as Foundation Medicine and Sequenom as another long-term growth opportunity. And it said that Illumina is focused on other growth opportunities for sequencing in the areas of molecular diagnostics, cancer management, agricultural biotechnology, veterinary medicine, and forensics.

Additionally, the board said that Illumina would deliver greater value to stockholders as an independent entity, citing its five-year performance of generating an 84 percent return on investment despite a nine percent decline in the S&P 500. The company has also routinely exceeded shareholder expectations and delivered compelling results, the board added.

Illumina said that it came to this conclusion after several meetings with its board and financial and legal advisors, who also said that the proposal was inadequate.

"At this juncture, we believe the only course of action consistent with those principles is to vigorously resist Roche's blatantly opportunistic attempt to acquire Illumina at a grossly inadequate price," the company wrote in a letter to Roche's chairman Franz Humer.

"We are disappointed that Illumina's board of directors has recommended against our offer and refuses to engage in substantive discussions with Roche," said Roche's CEO Severin Schwan in a written response today.

Roche continues to believe that its offer is "full and fair" and "provides a unique opportunity" for Illumina's shareholders, he said.

"As we have previously stated, it remains our preference to enter into a negotiated transaction with Illumina and we stand ready to commence discussions at any time," Schwan added.

Roche reiterated that it plans to nominate a slate of candidates for election to Illumina's board of directors at the company's 2012 annual meeting, and to propose an increase of Illumina's board so Roche can gain a majority (IS 2/7/2012).

Following Illumina's rejection, Vamil Divan, an analyst from Credit Suisse, wrote in a research report that while the decision was expected, it is unclear what will happen next. There are no other "obvious white knights ready to step in," he wrote, and Roche is the most logical fit with Illumina.

Given Roche's recent acquisition history, the firm believes that Roche will "let the process play out" and "increase its offer if necessary" in order to obtain Illumina. He further predicted that there is an 80 percent chance Roche will acquire Illumina for $60 per share, and as a result Credit Suisse has upped its target price from $34 to $56 per share.

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