By Jake King
The news this week that Thermo Fisher Scientific (TMO) will be coughing up $13.6B to acquire Life Technologies' (LIFE) finally brought to earth rumors that had been swirling since early this year. In February, PropThink wrote that investors could take confidence in the standalone prospects of LIFE with a shot at a buyout premium as the market chatter continued. Considering the $76 per share buyout price announced on Monday morning, LIFE shareholders will reap 18% since we opined on the topic. But the news has implications for fellow sequencing-developer Illumina (ILMN) as well. Roche (OTCQX:RHHBY) has long been in pursuit of Illumina, however discussions earlier this year came to a halt as Roche considered Illumina's asking price "unrealistic" and, as far as we know, left off negotiations. The story is coming full circle, however, as Thermo Fisher's willingness to pay up for LIFE sets a precedent for Roche that premiums in this expanding segment of healthcare aren't unheard of. LIFE traded around $60 when its strategic evaluation was announced in January, thus the deal comes in at a 26% premium to levels prior to widespread take-out chatter. Roche has clearly wanted Illumina's sequencing technology since early in 2012 when the two walked away from the negotiating table for the first time, and seeing a strong new competitor emerge with Thermo Fisher's latest acquisition should light a fire under the Roche management team and Board. In addition, BGI Shenzhen picked up Complete Genomics in March understanding that demand in the DNA sequencing space is increasing as margins improve. With that in mind, plus Illumina's strong standalone prospects (Mr. Deryugin considers it the sequencing leader), investors can own ILMN for multiple reasons.
Like part-time lovers, Roche and Illumina just can't call it quits. The Roche/Illumina romance started in 2012 when Roche went straight to ILMN shareholders with a hostile takeover bid as the two companies failed to come to an amiable acquisition agreement late in 2011. The bid was rejected by Illumina, and Roche revised higher in April, which was again rebuffed. Rumors continued to swirl that the two were in discussions through the end of last year, and PropThink outlined some key pieces of evidence in December (see PropThink's prior article); aside from signaling that a sequencing acquisition is of interest, Roche has made clear its bias towards M&A to create shareholder value. It was only in January of 2013 that Roche Chairman Franz Humer said explicitly that Roche was walking away from the negotiating table.
Nevertheless, both Roche and Illumina are feeling the heat to get something done. Roche's need to improve its own diagnostics business has been apparent, and with a close competitor, Thermo Fisher, willing to pay up for a fellow sequencing company, Roche is under pressure to make some changes. At the same time, the playing field for Illumina is changing. The company failed to usurp BGI Shenzhen earlier this year in an attempt to buy Complete Genomics (GNOM), and BGI won out. Not only has that acquisition, BGI's purchase of GNOM, created a new and strong competitor in DNA sequencing, but Illumina may have lost one of its largest customers; BGI will be focusing on Complete Genomics' technology - now its own - rather than emptying its pockets for Illumina. All-in-all, as the landscape has changed drastically in the last month, there's incentive for both Roche and Illumina to pay each other another visit.
Roche's $66.00 bid for Illumina that was rumored in December was an interesting data point. It's possible that Roche's Board wasn't willing to go that high, but with the new valuation for Life, things have changed. There's reason to believe that the two can come to an agreement. We've seen that Illumina and Roche can't seem to part ways despite their differences, and Illumina is right in Roche's $7-8B acquisition sweet spot on an EV basis. It certainly makes sense, and with two other acquisitions going down in the last month, the playing field is narrowing as larger and stronger players emerge from the dust. While buying ILMN purely on buyout speculation would be ill-advised, Illumina's growth potential, says Mr. Deryugin, supports the company as a standalone entity even if nothing materializes over the short-term.
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