Replies to post #106210 on Biotech Values

[DewDiligence]

Why the Kneejerk Response to Buyout Offers is No

http://blogs.wsj.com/deals/2010/10/14/in-ma-shareholders-win-may-be-ceos-loss

›In M&A, Shareholders’ Win May Be CEO’s Loss

October 14, 2010, 5:49 PM ET
By Gregory J. Millman

Many CEOs stand to come out losers if they sell their companies, even when shareholders would reap a substantial premium.

Only 14.5% of chief executives would do better selling their companies at a 25% premium than they would under their current pay packages, according to an analysis of compensation packages for CEOs of companies in the Standard & Poor’s 1500 index by compensation consulting firm Shareholder Value Advisors.

In many cases, the loss of expected future pay and the option time value would more than wipe out gains on equity and on the spread between the option exercise price and the take-out price.

Consider Genzyme CEO Henri Termeer. The board has twice rejected Sanofi-Aventis’s recent hostile $69-a-share offer as inadequate. The price is a 27% premium to Genzyme’s $54 closing price on July 22, the day before reports of Sanofi’s interest.

Though shareholders could pocket the premium, he would be a net loser, as the gain on his stock would be more than offset by the loss of future pay and the loss on time value of his options. Genzyme declined to comment.

Sanofi would have to offer $71 a share for Termeer to break even. To improve on his July 22 position by 25% Sanofi-Aventis would have to offer around $90–well above Genzyme’s roughly $80 historic high in January 2008.

Dow Jones Investment Banker asked Stephen O’Byrne of Shareholder Value Advisors to rank the CEOs of S&P 1500 companies by the answer to the question, “Would a target company CEO win or lose in an acquisition that brought target shareholders a 25% premium?” The analysis showed that only 14.5% of CEOs would be richer if they backed such an offer and departed the company.

The analysis covers 924 firms from the S&P 1500, based on the data from ExecuComp current as of December 2009. Excluded are companies that changed CEOs since then. Also excluded are CEOs whose tenures are too short to estimate future pay, and firms no longer in the S&P 1500. The 25% threshold is a rounding: The average premium over a preannouncement stock price for acquisitions of S&P 1500 targets in the last three years has been 27%. [The average for biotech buyouts during the past few years is higher than that—see #msg-55426176.] This Excel spreadsheet shows how far these CEOs’ interests may diverge from shareholders’ interests.

The CEO perhaps best positioned in a sale situation is Paul D. Finkelstein of Regis Corp., a hair salon franchiser with a roughly $1 billion market cap. The analysis indicates that Finkelstein’s wealth totals $27 million but would jump to $66 million if the company sold at a 25% premium. He is one of six CEOs who would at least double their wealth in such a sale. Regis didn’t return phone calls seeking comment.

The analysis also showed that most CEOs–729, or 78.9%–would be significantly worse off (more than a 5% loss) if their companies were acquired at a 25% premium, though shareholders likely would be better off. Of those CEOs, 428, or 46% of the full sample, would see their wealth fall by 50% or more in a sale that brought shareholders a 25% premium.

Another 61 (6.6%) CEOs would come out roughly even (within +/- 5%) with a sale at a 25% premium.

The analysis factors in three basic elements of compensation: equity (stock and options); the present value of expected future pay; and pension. The analysis is based on pretax numbers and assumes a retirement at 65. The analysis doesn’t factor in the possibility that the CEO of a target company might be retained by the new owners or find another job, mitigating any losses.

Termeer’s case shows how a CEO can come out a loser. Under Sanofi’s $69-a-share offer, the Genzyme CEO would show a profit of $8.5 million on his Genzyme options (which increase in value from $62.4 million to $70.9 million) and $9.6 million on his Genzyme stock. The 13.6% gain on the options—roughly half of the premium shareholders would pocket in the sale–comes because the higher stock price is offset by his loss of the time value of the options.

Termeer also would get a cash change-in-control payment of $11 million. So he would pocket $29 million if Genzyme accepts the $69-a-share offer. However, he would lose $38 million in the present value of three year’s future pay and so would end up $9 million in the hole.‹

[DewDiligence]

Recent Biotech Buyouts

[Added STJ-AGAM (shown in red).]

 
 Acquired         Premium    Deal         iHub  
 Company  Buyer   to Market  Value  Date  Reference  
 GNLB     GSK       465%     $57M  10/08  #msg-33209281 
 MEMY     Roche     319%     $50M  11/08  #msg-33787598 
 KOSN     BMY       233%     $190M  5/08  #msg-29647147 
 MGRM     LH        171%     $155M  6/09  #msg-38960958 
 COLY     PFE       167%     $165M 11/07  #msg-24600805 
 NTMD     Deerfield 158%‡‡‡  $36M   1/09  #msg-35132470 
 EYE      ABT       149%   **$2.8B  1/09  #msg-34762429 
 IOMI     Intercell 147%     $190M  5/08  #msg-29232165 
 BTRX     Stiefel   136%     $150M  6/08  #msg-30201906 
 Tepnel   GPRO      126%     $132M  1/09  #msg-35221710 
 SGXP     LLY       119%     $64M   7/08  #msg-30547648 
 ENCY     PFE       118%     $350M  2/08  #msg-26978155 
 TRCA     Ipsen     104%     $660M  6/08  #msg-29795183  
 CRY.to   MDT        97%     $380M  9/08  #msg-32421462 
 Speedel  NVS        94%     $880M  7/08  #msg-30588524 
 MNT      JNJ        92%     $1.1B 11/08  #msg-33879830 
 MEDX     BMY        90%     $2.1B  7/09  #msg-39801273 
 SIRT     GSK        85%     $620M  4/08  #msg-28705020 
 ZGEN     BMY        84%     $885M  9/10  #msg-54152162 
 CVTX     GILD     *‡76%     $1.4B  3/09  #msg-36225695 
 MOVET.BR Shire      74%     $560M  8/10  #msg-52918245 
 IDEV     ENDP     *†74%   *†$370M  1/09  #msg-34592416 
 LEVP     VPHM     ††73%   ††$510M  7/08  #msg-30704409 
 TARG     MDCO    ***72%     $42M   1/09  #msg-34774402 
 Ventana  Roche      72%     $3.4B  1/08  #msg-30912677 
 Jerini   Shire     *71%     $520M  7/08  #msg-30452872 
 APNO     Cell Bio   70%     $20M   9/09  #msg-43348606 
 AAH.AX   CEPH       69%     $207M  2/09  #msg-35956544 
 OSTE     MDT        65%     $123M  8/10  #msg-53410183 
 TLCR     Grifols    64%     $3.4B  6/10  #msg-50961841 
 FACT     ABT        64%     $450M  3/10  #msg-47606240 
 Acambis  SNY        64%     $550M  7/08  #msg-30990498 
 JAV      HSP        64%     $141M  4/10  #msg-48881292 
 SCRX     Shionogi   61%     $1.4B  9/08  #msg-31859174 
 BFRM     Merz       60%     $253M  1/10  #msg-45071380 
 ASPM     COV        56%     $210M  9/09  #msg-43348479 
 OSIP     Astellas   55%     $4.0B  5/10  #msg-50234451 
 IDMI     Takeda     55%     $75M   5/09  #msg-37898204 
 BSMD     MMSI       54%     $96M   5/10  #msg-50161877 
 ATSI     MDT        54%     $370M  4/10  #msg-49617936 
 ALO      KG       ‡†54%     $1.6B 11/08  #msg-33763449 
 MEDI     AZN      ‡‡53%     $15.2B 4/07  #msg-19020387 
 MLNM     Takeda     53%     $8.8B  4/08  #msg-28365383 
 TRBN     EBS     ***52%     $97M   8/10  #msg-53271836 
 PCOP     LGND    ***52%     $75M   9/08  #msg-32404474 
 CLZR     ELOS       51%     $65M   9/09  #msg-41293512 
 OMRI     JNJ      ‡*51%     $465M 11/08  #msg-33762745 
 IMCL     LLY     †††51%     $6.5B 10/08  #msg-32662830 
 MYOG     GILD       50%     $2.5B 10/06  #msg-13712121 
 MIL      Merck KGaA 50%*†*  $7.2B  3/10  #msg-47249493 
 CRGN     CLDX       50%     $40M   5/09  #msg-38262967 
 PHRM     CELG       46%     $2.9B 11/07  #msg-24645394 
 BRL      TEVA       42%   **$9.0B  7/08  #msg-30792830 
 AGAM     STJ        41%     $1.3B 10/10  #msg-55673504 
 KG       PFE        40%     $3.6B 10/10  #msg-55425514 
 MOGN     Eisai      39%     $3.9B 12/07  #msg-25163775 
 SGP      MRK        34%     $41B   3/09  #msg-36140327 
 HTRN     ENDP       34%     $223M  5/10  #msg-49838813 
 SMTS     COV        32%     $250M  6/10  #msg-51344183 
 CGPI     Galderma   30%     $420M  2/08  #msg-28286522 
 WYE      PFE        29%     $68B   1/09  #msg-35077617 
 APPX     Fresenius †29%     $940M  7/08  #msg-30498388 
 SEPR     Dainippon  28%     $2.6B  9/09  #msg-41143301 
 Zentiva  SNY      ‡‡26%     $2.6B  9/08  #msg-32327005 
 NOVN     Hisamitsu  22%     $428M  7/09  #msg-39515681 
 PPCO     ENDP       19%     $168M  8/10  #msg-53137069 
 EVVV     COV        19%     $2.6B  6/10  #msg-50797343 
 ABII     CELG       17%     $2.9B  6/10  #msg-51844360 
 ACL      NVS     *‡‡17%  *‡‡$49.7B 1/10  #msg-45072999 
 CGRB     JNJ        16%     $970M  5/09  #msg-38039851 
 DNA      Roche      16%   †*$46.8B 3/09  #msg-36224175 
 ARI.to   Roche     ‡15%     $190M  7/08  #msg-30904056 
 SENO     BCR        14%     $213M  5/10  #msg-49838776 
 CEGE     BPAX        6%     $38M   6/09  #msg-39163410 
 MEND     JNJ         6%     $480M  7/10  #msg-52176337 
 VXGN     OXGN       (4%)    $33M  10/09  #msg-42578130 
 AVGN     MNOV    ***(7%)    $38M   8/09  #msg-40769841 
 VRX      BVF        (7%)    $3.9B  6/10  #msg-51505172 
 PGLA     Avexa       ®         ®  12/08  #msg-34341452 
 NUVO     ARCA        ®         ®   9/08  #msg-32420015 
 NOVC     TSPT        ®         ®   9/08  #msg-31869987 
 VSGN     IPC*††      ®         ®   8/09  #msg-40603745 
  
 ®Reverse merger with private or non-US company.  
  
 ‡Number is misleading inasmuch as Arius announced in 
 May 2008 that it was pursued by an unnamed suitor. 
  
 ‡‡Premium relative to commencement of bidding. 
  
 ‡‡‡To be liquidated by Deerfield following failed merger with 
 Archemix; premium relative to 11/18/08 date of Archemix deal. 
  
 ‡†Based on closing price 8/21/08, the day 
 before KG announced initial buyout offer. 
  
 ‡*Based on 11/20/08 close. 
  
 †Premium reaches 63% if earn-out met. 
  
 ††Premium and deal value based on 0.45/sh of contingent payments. 
  
 †††Premium relative to 7/30/08 close, the 
 day before BMY announced first buyout offer. 
  
 †*Price for 44% of DNA not already owned. 
  
 *199% premium to volume-weighted 
 price during preceding 3 months. 
  
 **Deal value includes assumption of debt. 
  
 ***Premium and deal value exclude contingent payouts. 
  
 *‡Premium relative to 1/26/09, the day 
 before Astellas announced $16/sh offer. 
  
 *‡‡Price includes entire deal in three stages; 17% premium is the 
 blended avg price of NVS’ purchases ($164) relative to ACL’s market 
 price 4/4/08 immediately prior to announcement of first stage of deal. 
  
 *†Premium includes estimated value of contingent 
 payouts, but listed deal value excludes them. 
  
 *††IntelliPharmaCeutics. 
  
 *†*Relative to MIL’s price before announcement that co. was for sale.