Well, Roche’s (RHHBY) recent hostile bid to purchase for Illumina (ILMN) is a great case study to follow up my post “M&A Defense Checklist” and to prove that old adage that “the devil’s in the details”.

The Roche hostile offer for Illumina highlights two of my points,

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1. There is higher risk of hostile activity for all companies now.  Illumina, before the offer, was trading at 4x revenue and 14x EBITDA: not what you’d consider a low valuation target although its stock was trading well below its 52 week high.
2. Companies should carefully review their M&A defenses to uncover and potentially fix any weaknesses before an aggressor uses them against the company.

As background on this case, after what appears to be a short courtship period, Roche launched a hostile tender offer to shareholders to buy Illumina at $44.50/share an 18% premium to Illumina’s closing price the day before the offer. Roche also announced that it intends to wage a proxy battle which would result in its slate of nominees comprising a majority of the Illumina board.

In my blog, I highlight an impressive article “The Chinks in Illumina’s Defense” by Steven M. Davidoff, who writes for the New York Times “DealBook”.

Roche’s proxy battle strategy will likely include proposals to:

1. Nominate board candidates for the 4 seats up for election this year;
2. Propose a by-law amendment to expand the size of the board by two members to 11 and nominate those two board candidates; and
3. Propose a shareholder vote to remove all of Illumina’s board without cause.

Illumina’s defenses include:

1. Staggered board of nine members with only 4 up for election this year;
2. Supermajority vote of 67% of all shares outstanding required to amend a by-law;
3. Shareholders can’t call a special meeting;
4. Shareholders can’t act by written consent; and
5. Poison pill which had expired in 2011 but could be reinstated by board action alone.

The article outlines Roche’s likely proxy strategy and points out the chinks or weaknesses in Illumina’s defenses. We can learn some valuable lessons from this battle, unfortunately at Illumina’s expense.

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