No White Knight Required


After a lowball offer, holding out for more can be a dangerous situation. The acquired company either needs a white knight to come in and top its unsolicited suitor or for the suitor to come to its senses.

Human Genome Sciences (NAS: HGSI) was teetering dangerously close to the same situation as Illumina (NAS: ILMN) , which spurredRoche's offer, eventually pushed the health-care conglomerate away, only to see its stock price fall below Roche's initial offer.

Fortunately for HGS, GlaxoSmithKline (NYS: GSK) was willing to raise its bid. A little. The companies announced today that HGS agreed to be taken out by Glaxo for $14.25 per share.

Of course, the offer was only 9.6% higher than Glaxo's initial $13-per-share offer back in April, suggesting there was no white knight in the works. Celgene (NAS: CELG) was reportedly interested, but it isn't clear whether Celgene walked away when investors balked at the idea or whether the leak from an unnamed source was just a bluff to get Glaxo to the table.

With the discrepancy on valuation, I'm a little surprised the deal ended up being all cash rather than including a contingent value right, as Sanofi (NYS: SNY) did when it acquired Genzyme. A CVR would have allowed Glaxo to offer a higher potential price while placing the risk that Benlysta doesn't take off or that drug candidates discovered by HGS aren't approved on the shoulders of HGS's shareholders.

With shares trading fairly close to $14.25 last week, there wasn't much wiggle room to add a CVR and lower the price without it getting close to a take-under. Investors would have surely balked at a cash price below Friday's close even if there was $5 or more potentially coming if Glaxo hit certain milestones.

It sure looks like Glaxo got a good deal here, but it wasn't a total steal. At a cost of $3 billion net of cash and debt, sales of Benlysta will need to increase substantially to justify the purchase; fortunately, they're headed in the right direction.

The big losers in all this seem to be the investors who bought shares after the phase 3 trial successes were announced. The takeout price is less than half the post-approval highs set back in early 2011.

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