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The way to win a poker is to be unpredictable; remind me not to play if Roche executives are sitting at the table.
When Roche initially made a play for Illumina (Nasdaq: ILMN ) , I pointed out that a higher bid was likely to come, as was the case for its hostile bids for Genentech and Ventana Medical Systems. The raise came, but much earlier than expected.
Now Roche said it's walking away from the deal after the company failed to win any seats on Illumina's board. Roche doesn't plan to extend its tender offer for $51 per share that's set to expire tomorrow.
Is that it? Game over? I doubt it. As I see it, Roche is still sitting at the table with cards in its hands. Roche's problem from the beginning has been that Illumina wouldn't sit down and play the negotiation game. Threatening to walk away looks like a move to try to engage Illumina.
I doubt it'll work -- at least not yet. Illumina has support of its shareholders; preliminary results indicate that only 6% of shares voted for Roche's slate. Management can sit back and wait for Roche to increase its offer to a nice starting place for negotiations.
The risk, of course, is that Roche isn't bluffing. That it really plans to look elsewhere for sequencing technology or just invest in other areas of its business. Turning down a last-and-final offer can be costly; Yahoo! trades well below the $31-per-share bid from Microsoft in 2008. Same situation for Take-Two Interactive Software after it spurned a bid from Electronic Arts.
What Illumina really needs is another bidder to shake things up. But I just don't see that happening. Abbott Labs (NYSE: ABT ) is busy with its breakup, and I don't know of any other diagnostic companies large enough to justify an acquisition. Illumina would fit into a company that sells other research products to scientists -- Sigma-Aldrich or Thermo Fisher Scientific (NYSE: TMO ) -- but the real value in Illumina is in the push toward diagnostics. There's a lot more patients than there are scientists.
I like Illumina better here at the knocked-down price than I did with it trading well above Roche's offer price, but it's still a risky bet now that Roche has gone off script. Illumina could drop further if it becomes clear that Roche really isn't interested; going out and buying Pacific Biosciences of California (Nasdaq: PACB ) , Complete Genomics (Nasdaq: GNOM ) , or one of the smaller private sequencing companies would be a big clue.
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