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Roche Hostile Bid for Illumina is Just Getting Started

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After a rejection, it's reasonable to expect a higher bid but $60 a share may be too optimistic. A board battle looms.

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So, gene-sequencing specialist Illumina (ILMN) tells hostile bidder Roche to go get bent. It's not a surprise given Wall Street expectations that the company can hold out for a much better offer than the big Swiss drug maker's $44.50 a share -- a $5.7 billion deal.

The question is what is the right price? Illumina shares are trading just above $52 each. Some news reports suggested the company may sell for $60 a share -- a stretch given the current offer. Roche says it's not going away as it sees the promise of gene analysis to help develop personalized medicine. So far, no other company is stepping up to be Illumina's white knight.

I've seen this movie before. It usually ends with a deal somewhere between what the hostile acquirer is offering and the hopeful number that's floated by bullish analysts or those working for the target company.

Former Genzyme CEO Henri Termeer held out for months before striking a $20 billion deal to sell his company to Sanofi (SNY) last year. (See Sanofi Nabs Genzyme.) That transaction is quite different from the attempted Illumina takeover. The businesses are dissimilar. But also, Sanofi figured out a way to mitigate its risk through future milestone payments tied to a Genzyme drug. Those payments were separate from the acquisition price. That may not be an option with Illumina.

However, the Illumina and Genzyme deals may be very similar if no other companies express an interest in buying Illumina.

"The (Roche) offer is grossly inadequate and dramatically undervalues Illumina's industry-leading position and growth opportunities," Illumina says in a statement.

CEO Jay Flatley is quoted saying that Illumina is "singularly positioned to expand its market leadership and to deliver value to our stockholders that is far superior to Roche's offer."

He adds: "Our industry is nascent, with the promise and potential to experience extraordinary growth in the years ahead as genetic information becomes broadly applied beyond molecular biology research, and into medical diagnostics, reproductive health and cancer management."

Meanwhile, Roche is putting together a slate of board nominees to wage a proxy fight with Illumina. There aren't a lot of options for the drug maker if it's serious about being in the business of genetic analysis.

"Roche has a broad-based offering in molecular diagnostics and research tools, but a limited presence in sequencing," RBC Capital Markets analyst Bill Bonello says in a note. "At this point, Illumina is probably Roche's only viable established target" in the gene-sequencing business.

Bonello raised his target price for Illumina to $52 and rates the shares a hold. Absent a bidding war, he doesn't see the shares going higher. The analyst does note that Roche has raised its acquisition price significantly in the past. He notes the 2008 takeover of Ventana Medical Systems, which was bought at $89.50 a share after Roche initially offered $75.

The day before Roche's offer was made public, Illumina closed at $37.68. The stock has traded above $55 on the initial news. Bonello predicts the shares would drop to at least $45 each if Roche walks away.

Twitter: @brettchase

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