Mergers and acquisitions, especially when they go hostile, are like a high-stakes poker match in which everyone tries to win the most with the least. The problem Roche faces is that it's raised its bids so many times that the first reaction of its targets is to call the company's bluff.
Earlier this month, Roche made a private $40-per-share offer for Illumina (Nasdaq: ILMN ) , which management at the genetic-equipment company flat-out turned down. Roche came back with a public offer at $44.50 a share.
Investors have figured out Roche's modus operandi as well. Shares are trading more than 20% higher than Roche's tender offer.
Offering lowball bids and raising the bid until the deal can get done is something Roche has plenty of experience with. The protracted negotiations between Roche and Genentech eventually led to an increase in the initial bid. Ditto for its acquisition of Ventana Medical Systems.
How much higher depends on whether another bidder comes along, how much Roche really wants lllumina, and how well Illumina can play hardball. Let's break it down.
Another bidder? Researchers have been the primary market for Illumina's genetic-decoding equipment -- gene chips and sequencers -- but as the price of sequencing comes down, future growth will come from patients in the clinic. Illumina is probably more valuable to companies like Roche with a diagnostic testing arm than a provider of research products -- Sigma-Aldrich or Thermo Fisher Scientific (NYSE: TMO ) , for instance. Illumina might be too big of a bite for Sigma, but Thermo Fisher could handle it if it wanted to push into diagnostics. The most obvious diagnostics suitor, Abbott Labs (NYSE: ABT ) , might be out of the running since it's dealing with the internal split of the company.
Another target? Illumina isn't the only genetic-sequencing company around, but it's probably the best fit for Roche. Life Technologies (Nasdaq: LIFE ) is Ilumina's biggest competitor, but it also sells other wares for researchers; Roche would need to move in that direction or have a plan to divest the other products if it were to buy Life Technologies. Pacific Biosciences of California (Nasdaq: PACB ) has newer-generation sequencing technology, but it's still early in development. Complete Genomics would be another option, but that would push Roche into the sequencing service business rather than development of machines and tests.
Play hardball? Hostile bids ultimately come down to shareholders. If shareholders tender their shares and/or vote Roche's nominees onto the board of directors, Roche will gain control. So far, shareholders seem to have management's back, so Illumina doesn't have to do anything but sit back and wait for Roche to continue bidding against itself.
All told, I think Roche raises its bid, but watching poker isn't any easier than playing it when you don't have a camera to see everyone's cards. Unless you're a gambler, the risk-reward here is probably too great to buy shares this high above Roche's current bid.