After a week of rumors, Ventana Medical Systems (Nasdaq: VMSI ) urged shareholders to reject Roche's $3 billion hostile takeover bid last week. My guess is that this is only round one, and the nasty comments have only just begun.
After months of trying to negotiate a merger, Roche made a public $75 per-share bid last month. At the time, that was a 45% premium to Ventana's stock price. Investors quickly realized what a good thing they had, and the stock zoomed past Roche's offer price.
The companies have been swapping letters and making them public for investors to get an idea of what they're thinking. Ventana started the exchange with its rejection letter, including this juicy tidbit: "We have a serious concern that, to some significant extent, your interest in our company may be based upon confidential information shared with you or your affiliates for collaborative purposes." If Ventana believes that Roche is using knowledge about diagnostic tests Ventana has in the works to buy the company before investors can assimilate the information into the share price, I can see why it would reject a lowball offer.
While Roche's CEO, Franz Humer, says the offer is "full and fair," he seems to leave open the door to a higher offer, saying, "To the extent that you believe that Ventana has additional information that would support a valuation in excess of our offer, we would be willing to consider it in a negotiation with you." Ventana isn't interested, stating that Roche's offer is so low that it doesn't even want to begin negotiations.
Even if Roche is able to convince Ventana's board -- or the shareholders -- to accept an offer, it would still be an uphill battle for the company. Arizona's Anti-Takeover Act restricts outsiders who buy more than 20% of a company from exerting voting rights for three years -- talk about a deal breaker. (Ventana is based in Tucson.) Last month, Roche filed a lawsuit asking that the law be found unconstitutional. Compounding Roche's problems, its "poison pill" bylaws would allow Ventana to resist the takeover by selling additional shares to investors at a reduced cost, thus making it more expensive for Roche. Roche has filed another lawsuit about this provision.
In many ways, Ventana is actually a perfect match for Roche. One of Ventana's tests determines if patients will respond well to Roche's breast-cancer treatment Herceptin, its second-best-selling drug. If it could get doctors to increase the use of the test, Roche could increase Herceptin sales beyond the $1.2 billion in sales last year. If Roche were simply a drugmaker, a co-marketing deal for the test might be in its best interest. But, in addition to manufacturing drugs, Roche is one of the largest diagnostic test manufacturers. By acquiring the entire company, it could use its sales force to lower costs and increase sales. The only question now is if it can get the company at a reasonable price before another suitor steps in.
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