Glaxo's $2.6 Billion Takeover Is Thrown Out

This afternoon, "big pharma" giant GlaxoSmithKline (NYSE: GSK  ) admitted that its formal approach to purchase one of its development partners was abruptly rebuffed last week.

Just say no to Glaxo
GSK's attempt to envelop Human Genome Sciences (Nasdaq: HGSI  ) in a big bear hug backfired when the HGS board of directors immediately rejected its takeover bid.

On April 11, GSK offered $13 a share in cash to acquire the entire equity capital of HGS, which is working with GSK to co-develop three drugs: Benlysta (to treat systemic lupus erythematosus), albiglutide (to treat type-two diabetes) and darapladib (to inhibit lipoprotein-associated phospholipase A2 and, possibly, atherosclerosis).

Yesterday HGS shares closed at $7.17, so GSK's offer represents an 81% premium to the closing price on April 18.

In his April 11 letter to Human Genome Sciences CEO Thomas Watkins, GSK chief executive Sir Andrew Witty explained that this $13-a-share offer offered a 73% uplift to the HGS closing price of $7.53 on April 10, as well as a 66% premium to its 30-day average trading price of $7.83.

Given the generosity of this deal and the fact that GSK and HGS have worked together for nearly 20 years, many HGS shareholders might be tempted to bite GSK's arm off. However, Tom Watkins and his team instantly rejected this approach without even putting it before their shareholders.

Mr Market reacts
HGS is attractive to GSK because absorbing it into GSK's corporate body would give the UK's biggest pharmaceutical company full control of three promising drugs in co-development. However, HGS's wider portfolio could also lure other big-pharma buyers keen to snap up a prized biotech asset.

Hence, in pre-market action before the Nasdaq opened for business this afternoon, HGS shares were trading at $14.28, up 99% and therefore almost double yesterday's closing price.

In his "Dear Tom" letter last week, Witty remarked, "We believe there is clear strategic and financial logic to this combination for both companies and our respective shareholders -- and that now is the appropriate time in the evolution of our relationship for our two companies to combine."

Sir Andrew went on to say: "This offer reflects full and fair value for Human Genome Sciences and the synergies inherent in this combination. It also eliminates substantial execution risk for Human Genome Sciences shareholders and delivers immediate and certain value that is superior to what we believe Human Genome Sciences can reasonably expect to create as a standalone company."

Obviously, Mr. Market disagrees, as HGS shares are set to open comfortably above the $13 per share on the table from GSK.

What next for GSK?
With nearly 200 million HGS shares in issue, GSK's bid of $13 a share is worth around $2.6 billion. While this is a big number, it is tiny in comparison with GSK's market value of nearly 74 billion pounds.

What's more, GSK claims that combining the two companies would produce cost savings of at least $200 million by 2015, with the transaction being earnings-enhancing from 2013.

As I write, GSK shares are up more than 1% at 1,460 pounds, which suggests that its shareholders like the look of its latest corporate land-grab. Hence, I suspect that GSK will have no choice but to raise its game, perhaps lifting its offer for HGS above $15 a share.

Lastly, as a long-term shareholder in GSK, I am delighted that the FTSE 100 firm is using its financial muscle, ultra-low borrowing costs and strong balance sheet to make a play for attractive assets. It's about time this high-yielding, "boring" mega-cap saw a bit of acquisition action!

Motley Fool UK writer Cliff D'Arcy owns shares of GlaxoSmithKline. Motley Fool newsletter services have recommended buying shares of GlaxoSmithKline. The Motley Fool has a disclosure policy.
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