For Roche, Genentech's "No" May Mean "Yes"

(MoneyWatch)  It was a hilarious moment in Genentech's third quarter earnings call on Tuesday. Despite the 800-lb gorilla in the room -- Roche's $89 a share bid for the company -- Genentech execs said they wouldn't answer any questions about the deal. Here's what they said, verbatim:

Regarding the Roche proposal, on August 13th a special committee of independent directors concluded, after careful consideration, that Roche's unsolicited proposal to acquire the outstanding public shares of Genentech for $89 a share substantially undervalues the company. The special committee announced that it would consider a proposal that recognizes the value of Genentech and reflects the significant benefits that would accrue to Roche as a result of full ownership. We will not be discussing anything further on the call today related to the Roche proposal.

That turned out to be only kinda-sorta true. During the rest of the call, the word "Roche" was uttered 23 -- twenty-three! -- times, mostly by Genentech execs. That's not too surprising of course -- the two companies have a gazillion joint ventures going on.

Nonetheless, the Roche bid is already negatively impacting Genentech's stock price, per MarketWatch:

A Genentech spokeswoman attributed the narrowed forecast to costs associated with an employee retention program that was launched in response to takeover bid by its largest investor, Swiss conglomerate Roche.

And in the SF Chron:

Its earnings of 81 cents per share fell short of the 88 cents predicted by analysts. The difference was due in part to the cost of a program to retain employees as majority shareholder Roche negotiates a takeover bid for Genentech.

Ouch! With Genentech's bottom line being eaten away by the mere presence of Roche, what is that doing to the M&A price of DNA? Making it cheaper, that's what. Fewer people think Genentech can command the $89 a share price Roche offered in the summer, according to the market. The Chron added:

Since then, Genentech's price has plunged below that offer price, as investors reacted to the instability of the economy. Before the release of the earnings report, the company's shares dropped $2.06 or 2.54 percent to close at $79.12.

In fact it was at $98.81 after the bid and closed at $81.50 Wednesday. Ouch, again.

Roche owns a majority of Genentech already. Given the benefits of owning that percentage of the revenue/income stream, it raises anew the question of why Roche would want to continue wasting its money -- and the retention compensation of its erstwhile partner -- on this bid. In fact, that level of waste just got worse for Roche, according to Barron's:

The only major barrier is Roche's ability to gain financing. Assuming normalization in the credit markets, we think a deal in the $90-per-share-and-up range is likely.

Possibly. But with Genentech's numbers looking rosy; the effects of the deal looking negative; the stock down $17 from its high; and Roche's financing getting pricier by the minute because of the credit market meltdown, Genentech will be lucky to get the $89 it's already been offered. Time to consider dancing with the one what brung ya.