Replies to post #72459 on Biotech Values

[corpstrat]

I'll forgo the temptation to suggest that Roche's PR's omissions and elisions would provoke indignant 'Scam!' denunciations if our favorite little company had made them, in favor of sticking to the temporarily more interesting business of the day.

Your interpretation of the PR's obscurities re the 78 and 90 per cent thresholds looks convincing and solves the puzzle. Presumably the protection of the minority holders is satisfied this way? Was a simple majority of the minority all that was required under the original Roche 56% acquisition arrangement? There are no other protections under law, right?

This remains a fascinating situation. There's only one strategic buyer for the DNA 44%: Roche. But the minority holders can choose not to sell, presumably a bet on DNA's earnings growth boosting the stock. Yet ultimately, how does the value from any such growth get to the minority shareholder? DNA does not pay dividends. Could Roche block them from doing so in future? Is / was DNA ever worth more than what Frans Humer or his successor decides? Have I been reading too much Le Carre?

[corpstrat]

I guess NYT Dealbook got there first

http://dealbook.blogs.nytimes.com/2009/01/30/figuring-out-roches-tender-offer/?hp

The Deal Professor By Steven M. Davidoff
Figuring Out Roche’s Tender Offer
January 30, 2009, 11:10 am



[The Deal Professor by Steven M. Davidoff]

Roche’s announcement that it intends to cut the price it is offering for Genentech and launch a hostile tender offer for Genentech’s shares is a surprise. It also sets up an interesting endgame as to how Roche will acquire all of Genentech.

Roche said in its press release Friday that it will commence a tender offer in a few weeks, and that the tender offer will be conditioned on “(i) a non-waivable condition that holders of at least a majority of the outstanding publicly-held Genentech shares tender their shares in the offer and (ii) that Roche has obtained sufficient financing to purchase all outstanding publicly-held shares and all shares issuable upon exercise of outstanding options and to pay related fees and expenses.”

Roche currently owns 55.9 percent of Genentech. The majority of the minority condition for the tender offer is presumably designed to meet the requirements of Delaware law.

Under Delaware law, parent-subsidiary freeze-outs accomplished pursuant to a merger are subject to entire fairness review. The law on this has become a bit intricate, but in summary, in a merger with Genetech the price paid must be fair and Roche must follow a fair, unbiased process. However, because of a quirk in Delaware law, Roche can sidestep this requirement by structuring its offer as a tender offer and including a majority of the minority condition in the offer.

Roche’s offer is not for a merger (which would in any event require the agreement of the Genentech board), but rather is a tender offer structured to avoid this entire fairness review under Delaware.

Still, Roche wants to acquire all of Genentech. A tender offer will still leave some of Genentech’s shares outstanding, requiring that Roche complete a merger to acquire the remainder of Genentech. If Roche obtains 90 percent of the Genentech shares Roche can initiate a short form squeeze-out merger to eliminate this minority without a shareholder vote. Under Delaware law this squeeze-out would not be subject to entire fairness review and would not require a shareholder vote.

Nonetheless, Roche and Genentech entered into an affiliation agreement on July 12, 1999 to govern the relationship of the parties. The agreement does not forbid Roche from pursuing this tender offer. However, the affiliation agreement spells out additional requirements as to how Roche is required to complete any merger even a squeeze-out.

Section 4.02 of the agreement requires that, for Roche to merge with Genentech, it must 1) obtain approval of a majority of the minority of Genentech’s shares voted at the meeting to approve the merger (excluding all 5 percent and greater holders) or, if a favorable vote is not obtained, 2) pay an amount in the merger equivalent to “the ranges of fair value” for Genentech’s stock as determined by two independent investment banks selected by Genentech’s independent directors.

Notably, in its press release Roche addressed the squeeze-out, saying “f following the consummation of the offer Roche owns 90% or more of the Genentech shares, Roche will seek to consummate a merger with Genentech.” This is different than the firmer language which typically states that an acquirer will promptly take steps to squeeze out the minority. However, Roche needs to fully acquire Genentech or it cannot obtain the cost-savings and synergies it trumpets in its press release, since it cannot then consolidate its operations into Roche.

As I wrote back in August, this also sets up a bit of game theory. Putting the value of the offer aside, I’m not sure whether Genentech shareholders will rush to take up this offer. Instead, Genentech shareholders may refuse to tender anticipating that Roche will need to increase its bid in order to obtain a squeeze-out after the tender offer, or alternatively, the two investment banks will assign a higher offer price.

Also in this scenario, under the affiliation agreement the independent directors are required to pick the investment banks if Roche doesn’t go the merger route and cannot obtain a majority-of-the-minority approval. The Genentech board could simply refuse to do this, putting Roche in a bit of a pickle.

However, the agreement also requires Roche to effect a squeeze out pursuant to the above procedures if it has owned 90 percent of Genentech for more than two months, creating the inference that the Genentech board’s obligation to appoint these investment bankers is mandatory. Of course, the Genentech board may pick whichever investment banks they want, something Roche will want to avoid, but an event Genentech’s shareholders will anticipate.

Roche could have just launched the tender offer on Friday. Given the requirements under the affiliation agreement for a complete acquisition of Genentech and the incentives it creates, Roche is much better off with a pre-agreed deal.

Unless Roche has an argument as to why these provisions of the affiliation agreement do not apply, Friday’s announcement and price cut appears to a way of moving the Genentech special committee towards a deal rather than a real hostile offer. –Steven M. Davidoff

Go to Affiliation Agreement (Exhibit 10.1 to Genentech’s 1999 S-3) »