Calling This Buyout Offer Bluff

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"You'll take it and you'll like it!"

That seems to be the attitude Roche (OTC: RHHBY) is taking by reiterating an offer that's already lowballing Illumina (Nasdaq: ILMN  ) by about $7 per share. This bullying stance hasn't gone over too well with Illumina's management and its shareholders, as might be expected. Many analysts, including the Fool's own Brian Orelli, expect Roche to bump up its $44.50 bid, as it's been forced to do multiple times in past acquisitions. There's no telling how long the battle will drag on, but keeping the offer as it stands can't sit well with Illumina, which has called Roche's bid "grossly inadequate" and "blatantly opportunistic."

"Pretty insulting" might be next on the list of retorts. Granted, no serious shareholder would want to give up $7 per share. Where will the offer have to go to make this a worthwhile deal for both parties -- and will any result be enough to maintain Illumina's current technology edge in an industry where innovation seems to happen every week?

Blood in the water
At an 83 P/E, Illumina is right back to where it was a year ago, at a terrifically optimistic level far beyond rival Life Technologies' (Nasdaq: LIFE  ) 22 P/E. Going forward, Illumina shareholders are clearly expecting explosive growth, and I can't blame them -- the potential for everyday genome sequencing is huge. The machines-and-reagents model both Illumina and Life Tech are pursuing could make today's earnings look like small potatoes when millions (or even billions) of sequences are run yearly.

At the same time, Illumina's current leadership position is under siege, both by Life Tech's recently unveiled cheaper machine and by other unexpected competitors like Oxford Nanopore, whose handheld sequencer generated tremendous buzz when demonstrated earlier in February. Pacific Biosciences (Nasdaq: PACB  ) also has a horse in this race, but it's going to have to really blow the doors off the competition with its next-gen sequencer to make inroads. The cost of sequencing is dropping so rapidly that it's sped right past Moore's Law, so there's no guarantee of market dominance in the future.

Illumina has some key partnerships, including one with maternity-test specialist Sequenom (Nasdaq: SQNM  ) , that could keep it ahead of the pack. There's no reason that  Sequenom can't also cooperate with Life Tech, Pac Bio, or Oxford Nanopore should their machines turn out to be more cost-effective. The presence of a "killer app" may not be as critical to doctors and researchers as high speed and precision at the lowest cost. Switching sequencers would set back progress, but if a competitor undercuts Illumina on cost without sacrificing accuracy, it makes more sense to adopt that platform.

Foolish final thoughts
Illumina's current market cap is (relatively) small potatoes for a behemoth that's gobbled up Genentech for $46.8 billion, but that business model was arguably more established and its future better understood than Illumina's. Illumina's development hasn't relied on the deep pockets of bigger benefactors so far, but competition is always around the corner. What price justifies losing out on the potential for huge growth, if it means eliminating the possibility of huge losses should Illumina eventually stumble and lose the race?

Add Illumina to your Watchlist to stay on top of this shifting situation. If you're looking for another opportunity to invest in the future of medicine, take a look at The Motley Fool's latest free report on one fast-growing company that's transforming the way surgery works. It's profitable and growing and has prospects every bit as bright as genome sequencing's. Claim your free copy today to find out more.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights. Motley Fool newsletter services have recommended buying shares of Pacific Biosciences of California and Illumina. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 29, 2012, at 6:19 PM, unkownuser wrote:

    After Alex's obviously wrong statements about Sequenom in his last article (the incredible shrinking genome) which he refused to correct despite incontrovertible evidence to the contrary; how can anything this guy says be trusted without knowing what kinds of kickbacks he is receiving?

  • Report this Comment On February 29, 2012, at 6:30 PM, XMFBiggles wrote:

    Yes, the kickbacks. Nothing says "this guy's on the take" like pondering whether or not a company would change alliances if a cheaper option presents itself.

    I'm ready for my big sack of money now, Wall Street! Just leave it by the back door!

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