2 Suitors Are Better Than 1

Marriage proposals aside -- and some might argue even in those cases -- it's almost always better to have two suitors than one. Be it job offers or potential acquirers, more demand means a higher premium an individual or company can fetch.

Just look at the two drugmakers that announced they had accepted takeover offers today.

Company Being Acquired

Suitor(s)

Share Price Before First Offer

Today's Offering

Premium

Genentech
(NYSE: DNA  )

Roche

$81.82

$95.00

16.1%

CV Therapeutics
(Nasdaq: CVTX  )

Astellas Pharma and Gilead Sciences (Nasdaq: GILD  ) .

$11.35

$20.00

76.2%

Previous acquisitions have shown the same trend. Wyeth went for a 30% premium on the price it was fetching before the media reported the deal was in the works, and Schering-Plough got a similar 34% bonus. Compare that to ImClone Systems, which eventually managed a 50% premium when Eli Lilly outbid Bristol-Myers Squibb for the pleasure of owning ImClone.

Of course there's always the possibility of a company outbidding Pfizer (NYSE: PFE  ) or, especially, Merck (NYSE: MRK  ) . Schering-Plough sells Johnson & Johnson's (NYSE: JNJ  ) Remicade overseas and, while an acquisition that large would be uncharacteristic of Johnson & Johnson, it's certainly a possibility.

Unfortunately for Genentech shareholders, it's a little hard to justify the $112 per share at which the company valued itself when another company is unlikely to come along and offer more. Roche already owns 66%, which I guess it would be willing to sell -- everything has a price after all -- but ironically would likely demand a much higher premium than it was willing to give the minority shareholders.

But wait there's more
Apparently some CV Therapeutics' shareholders think Astellas, which was rejected with a $16-per-share offer, will top Gilead's offer. The stock is trading slightly above the $20 cash offer today.

The fit with Astellas is certainly a good one, because the Japanese drugmaker already sells CV Therapeutics' heart-imaging diagnostic aid, Lexiscan, but both companies are really after the rights to CV Therapeutics' angina treatment, Ranexa. Gilead expanded outside of its core HIV treatment zone and into heart drugs a few years ago with the acquisition of heart drug Letairis and clearly wants to get the most out of its sales reps.

Gilead has paid up dearly for the right -- it doesn't expect the acquisition to substantially help the bottom line until 2011 -- and I'm not sure Astellas is willing to go over the top. One reason is that the yen has fallen considerably since the offer was announced in January, making an even higher purchase in dollars much more expensive for Astellas. The bidding war could continue, but I wouldn't bet on it.

Foolish lesson
Buying shares of a company because you think it's going to be acquired is rarely a good idea. Sometimes "buy the rumor, sell the news" works, but often it can get you into trouble. It's much better to buy shares based on how you think other investors will value it in the future rather than how much another company might be willing to pay to take it under its wing.

But, if you're debating between investing in two companies, picking the company that is more flexible in its ability to be acquired might end up rewarding you in the long run. Companies like Onyx Pharmaceuticals and Elan (NYSE: ELN  ) look like great bargains right now, trading well off their 52-week highs. But Onyx would likely have only one suitor: Bayer, the marketing partner for its only drug, while Elan has complicated deals with multiple partners that make a takeover unlikely. Investing in either isn't a bad idea, just realize that a takeout premium may be low to nonexistent.

Pharma M&A isn't likely to stop anytime soon, so scoop up those bargains while you can, Fools.

More Foolishness:

CV Therapeutics and Elan are Motley Fool Rule Breakers recommendations. The newsletter is always on the hunt for hot drug stocks and other cutting-edge picks. Click here to see all of our latest discoveries with a free 30-day trial subscription. 

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Pfizer is a pick of Inside Value and a former pick from Income Investor. J&J is an Income Investor pick. The Fool has a disclosure policy.


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