Roche Holding

Genentech shareholders may hold a strong hand in the $40 billion poker game being played with Roche Holding, despite the Swiss drug maker bringing its 56% stake in the biotechnology pioneer to the table.
Under Delaware law, any company that acquires more than 90% of another in a tender offer can force the remaining shareholders to accept the offer price in order to close the deal. But Roche doesn’t have that luxury in this case.

That is because of restrictions on Roche going back to the 1999 affiliation agreement between the two companies that give more leverage to shareholders. In order to close the deal, a majority of the remaining Genentech holdouts must vote in favor of the Roche offer. If they reject such an attempt, two investment banks, chosen by the Genentech independent board, will provide an appraisal of Genentech’s value. The mean of the valuation ranges will be averaged to determine a price that the holdout shareholders must accept.
“I think any valuation [that they calculate] is higher than it is now. So why not hold out?” said Matt Loucks, a portfolio manager with Sit Investment Associates, which owns about 350,000 Genentech shares.
It also may benefit shareholders to await the outcome of a study on the cancer blockbuster Avastin, expected in the second quarter, to see if they can get more value out of their holdings.
“Since the squeeze-out of the remaining 10% will likely require a higher price, Genentech shareholders may decide not to tender now and hold out,” said Alex Edmans, a professor at the Wharton School of Business and a former Morgan Stanley investment banker. “In my view, this increases Genentech’s bargaining position.”

Roche has repeatedly expressed confidence in closing the deal and in its strategy. Chief Financial Officer Erich Hunziker boasted Wednesday that Roche hasn’t announced any major undertakings in recent years that it hasn’t eventually accomplished.

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