Illumina - 3 Times Is Lucky?

Jan.26.12 | About: Illumina, Inc. (ILMN)

Wednesday's biggest gainer on the street is Illumina (NASDAQ:ILMN) after Roche Holding AG (OTCQX:RHHBY) announced its intention to acquire the life-science company for $44.50 or $5.7 billion. Investors push the stock up to even greater heights as Illumina closed the day at $55.15, 24% above Roche's offer.

Market timing
This is already Roche's third attempt to acquire Illumina since 2007. It seems to take advantage by placing the bid after a serious stock correction took place. Last July the shares hit an all-time high of $75 but two cautious outlooks later (one in July and one in October) the shares hit $25 in December last year. This puts the 46% jump in the share price Wednesday in a different light, and might explain why investors pushed the stock up that far above the official offer price.

Management is reluctant
Roche is making the offer directly to the shareholders of Illumina as the management team again refused to negotiate with Roche. This time management will be under more pressure as the growth outlook for the full year has markedly slowed down in the second half of 2011 impacting the stand-alone value of the company.

Last year's correction
By July 2011 when the stock reached its all-time high of $75 analysts were expecting 2011 revenue to come in at $1.15 billion and earnings per share at $1.52 (in 2010 the company earned $0.87 per share on $900 million in revenue).

However by the end of July the company was forced to lower the quarterly guidance and shares promptly fell 17% on a single day to close at $57. In October a second warning caused the shares to slump over 30% in a single day closing at just $27.
The full-year outlook for 2011 now comes in $1.05 billion revenue on which earnings should come in at around $1.00 per share, a much slower growth pace compared with last year's.

Roche is getting penalized
The 4% drop in Roche's shares is quite surprising as the market could have foreseen another takeover attempt after the first two attempts failed. Furthermore Roche is persistent and in previous takeovers of Genentech and Ventana it also raised its initial bid in order to convince tendering shareholders.

Roche opened down 4%, which represents a loss of $6 billion in market value, but closed the day down 2%, narrowing the loss to $3 billion. Illumina on the other hand saw its market capitalization increase by $2.3 billion indicating that the market might expect another $700 million higher bid or roughly $5-$6 per share.

Market expectations are indicating that a deal might go through this time. Whit the fair value in the market around $60 a share, both parties could have a good deal. Illumina shareholders should tender anything above the $50 range as the stand-alone value has seriously been impacted by the company's slowdown in growth. Roche's shareholders should applaud the deal at anything below $60 as it will provide synergies with existing businesses and represent a nice addition to its cancer drug portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.