Genentech's No-Win Merger Situation (DNA)
Genentech (NYSE: DNA) was delivered the worst, or at least the second worst, bit of news it could have received. Late this week Roche delivered a crushing blow by lowering the offered acquisition price. This puts Genentech in a nearly untenable situation.
Roche already owns 55.8% of the Genentech outstanding shares and intends to commence a cash tender offer for all outstanding publicly-held shares to commence within approximately two weeks. Roche also intends to make the tender conditional upon a non-waivable condition that holders of at least a majority of the outstanding publicly-held Genentech shares tender their shares in the offer, that Roche can obtained sufficient financing, and other issues.
Genentech’s special committee has asked shareholders to take no action at this time as it will take a formal position within 10 business days following the commencement of such a tender offer. The committee’s formal statement even noted “Notwithstanding current market conditions, the special committee continues to believe that $89.00 substantially undervalues the company.”
It is very understandable that Roche would have more trouble raising the cash to make this acquisition. We have noted how the dollar strength might even become a factor. We have also shown in the past how many analysts believed a much higher price was coming its way and they even gave what they considered fair value targets.
Genentech is likely to pass on this deal. And some shareholders may opt to try to figure out a way to tender directly to Roche even on a partial basis (if Roche would entertain the notion). Others will hold out, even if Roche’s tender becomes a direct tender that is not an all or none proposal. This stock has traded higher than $89.00 and higher than $86.50 before there was a buyout and it traded above that level not even on buyout rumors. The Avastin franchise is a monster. From what we have seen, it seems to have more tumor fighting capabilities (tumor necrosis) than anything else on the market and the drug seems to work on many more and more new tumors.
Genentech is likely to formally reject and demand that Roche withdraw the tender offer. The market has obviously headed well south and the credit markets which Roche needs to tap for this deal are much more picky than when the merger was announced. A direct tender or an outright deal cancellation will probably hurt shares.
Many believe that Avastin and its other programs are worth far more than what Roche wants to pay and will expect this one to trade higher on its own.
For all practical purposes, Roche is a tracking stock. More than 50.1% of the public shares are owned by Roche. This is the risk of owning a company where more than 50% plus one vote is controlled by an outside party. Genentech and its shareholders likely want more. Roche either cannot or will not pay more. It is a stand off, and it comes with a huge risk to Genentech shareholders. If that tender is terminated and if Genentech runs into any hiccups at all between now and then, let’s just say that holders will be holding much less than today.
Jon C. Ogg
January 31, 2009
