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Is Roche Overpaying For Illumina?

|Includes:Illumina, Inc. (ILMN)

Roche (OTCQX:RHHBY) announced this morning that it has made a proposal to acquire Illumina (NASDAQ: ILMN, a provider of integrated systems for DNA sequencing, for approximately $5.7 billion. As part of the deal, Roche would acquire ILMN for $44.50 per share in cash, a 64% premium over the closing price on 21-Dec-11 (the day rumors about a deal began to fly). The hefty premium brings about a natural question: Is Roche paying too much?

With ILMN trading between $50 and $55 per share after the announcement, the market thinks Roche or another suitor is willing to pay more. That may be the case. However, back-of-the-envelope analysis says $44.50 a share could already be rich.

The significant purchase price relative to tangible equity (9.4x) indicates that a substantial amount of goodwill and other intangible assets will result from the transaction. Such intangible assets are supposed to represent excess earning potential. ILMN's relatively stable growth rate combined with its gloomy future outlook (see below), however, has us wondering where that excess earning potential is going to come from.

On 25-Oct-11, ILMN announced a global restructuring program. As part of the program, ILMN indicated that it would cut approximately 200 employees (of an estimated 2,100) and record $15 million - $17 million in 4Q11 charges. In the announcement, ILMN cited "uncertainties associated with academic and government research funding and the global economic environment" as its reason for the workforce reduction.

Stocks: ILMN