Do the winds favor Illumina in face-off with Roche?

With an Illumina shareholder meeting fast approaching, Roche did put forth a higher dollar amount in its hostile acquisition bid for Illumina, but a few proxy advisory firms are siding with Illumina in the opinion that Roche still isn’t offering a fair price

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SAN DIEGO—Even as Roche continues to maintain itis offering a generous per-share price in its hostile takeover attempt ofCalifornia-based Illumina, three proxy advisory firms have issued reports andstatements that agree with Illumina that the Roche offer remains inadequate,despite the recent boost to $51 per share from the $44.50 price it had held tofor weeks.
First out of the starting gate to back up Illumina'sstance were Institutional Shareholder Services Inc. (ISS) and Egan-JonesRatings Co. ISS, Illumina notes, says it considers the Roche offer to acquireIllumina inadequate and has recommended that its clients support there-election of Illumina's slate of directors and vote against all Rocheproposals at Illumina's 2012 annual stockholders meeting to be held on April18, 2012. Egan-Jones also recommended that its clients support the re-electionof the incumbent directors and reject Roche's proposals. 
ISS noted, in part, that "the current bid of $51…doesnot provide meaningful compensation for the potentially enormous long-termopportunity shareholders would forego by selling at this point…[and] fallsshort of providing a compelling enough consideration to cause Illuminashareholders to support Roche's nominees. …With the lack of serious competitionin the near future, and the vast potential for sequencing that is alreadystarting to appear, the board should rightfully be concerned about unnecessarytruncation of value by selling the company at too low a valuation of its future."
"Traditional financial metrics that focus onnear-term or past profitability—exactly the metrics on which Roche has focused—arenot particularly useful because they do not measure the one thing both currentshareholders and Roche are most interested in: the commercial potential of thecompany's disruptive technology, across a number of large addressable markets,"ISS added. The firm also maintained the decision by Illumina's board's decisionto pull the annual meeting ahead by approximately three weeks rather than delaythe shareholders' vote, which is not an uncommon move, "suggests both anopenness to shareholders' interests, and confidence in the integrity of theboard's own position on the value being offered."
"We are pleased that ISS, especially, recognizesthat Roche's unsolicited offer, even as increased to $51 per share, clearlyundervalues Illumina, and that our highly qualified and experienced independentBoard is best positioned to protect our value creation potential on behalf ofour stockholders," said Jay T. Flatley, president and CEO of Illumina. "Our boardwill continue to work closely with management to drive growth, delivercompelling results, and create significant stockholder value. We look forwardto the support of Illumina's stockholders at the annual meeting, and areconfident they will reject Roche's efforts to seize control of Illumina's boardand prevent a hostile takeover of their company at a grossly inadequate price." 

The ISS and Egan-Jones opinions were followed by theindependent proxy advisory firm Glass, Lewis & Co. LLC saying that isexpects the Roche solicitation "is intended to serve as little more thanadditional pressure to complete the transaction on Roche's terms, irrespectiveof whether they appropriately reflect Illumina's forward value or the board'sability to execute the company's stand-alone business plan in the currentoperational climate. With that considered, we find no cause for shareholders tosupport Roche's candidates, nor do we find any reason for shareholders toaccept such an expeditious engagement as appropriate in the context ofmulti-year lows in share price and valuation for Illumina."
While Illumina unsurprisingly noted it was pleasedwith the recommendation of all three of those firms, Roche took a differenttack, both criticizing ISS and noting it sees value in a Roche-Illumina combination. 

"While we are disappointed that ISS hasrecommended that Illumina shareholders vote against our director nominees atthe Illumina annual meeting, we are pleased that ISS noted that 'Roche wouldseem to be an excellent partner for Illumina as the sequencing industry growsmore intertwined with new drug development,'" said Severin Schwan, CEO of RocheGroup, in a news release—though no mention had been made of the other two firmon the Roche web site as this story was posted. "ISS also noted that the key toIllumina's valuation falls in its commercialization strategy—a strategy thathas not been tested but is an area in which we believe Roche could providesignificant expertise." 
Schwan added that Roche "respectfully" challengesthe ISS assertion that the current bid "does not provide a compelling startingpoint for negotiations."
"Our goal has always been to enter into anegotiated transaction with Illumina and we firmly believe that our presentoffer is more than adequate to serve as a basis for negotiation with Illumina,"Schwan said. "We remain willing to consider additional value if given theopportunity to enter discussions and perform due diligence. We expect thatIllumina shareholders will support this objective and vote for our directornominees at the upcoming Illumina annual meeting." 

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