Markets

A Worst-Case Scenario in the Roche-Genentech Bid

By Jim Edwards

Updated on: August 20, 2008 / 11:34 AM EDT / MoneyWatch

It's been nearly a month since Roche bid $44 billion to completely buy out Genentech, which seems like a good point at which to ask whether Roche, if successful, could end up destroying the value it's seeking to acquire.

When the bid was announced, there were immediate predictions that Roche was running the risk of overpaying for an office building in San Francisco with a sign that says "Genentech" on the front -- while all its employees and patient allies flee for other companies. In the last four weeks, those predictions have shown every sign of coming true, in part if not in whole.

So let's look at that worst-case scenario for Roche (because in a takeover, you're actually supposed to plan for these events).

There are four main problems emerging from Roche's bid:

A significant number of Genentech employees, who like their company's research-based, innovation-friendly culture, just don't want to work for a big, clunky corporation like Roche. They may leave. Here's an unrepresentative selection of employee feelings about Roche (warning: this leads to CafePharma, where the language can be salty). And here's some more from the science side.
Many of those scientists have stock options that will fully vest in a Roche buyout, giving them the funds to leave, as noted recently by Derek Lowe.
Venture capital funding for start-ups funded by ex-Genentech scientists is not difficult to get, giving them more funds to leave. Recruiters are already drawing upstaff wish-lists and phone are ringing off the hook, according to the San Francisco Chronicle.
And activist patient groups who have come to trust Genentech may take their loyalties â€" and marketing contacts â€" elsewhere if Roche takes over, according to the WSJ.

Meanwhile, Genentech's board has made it clear that it wants more than $89 a share, which was only a nine percent premium on the stock at the time of the bid. TheStreet.com's Adam Feuerstein thinks Roche should bid $123 a share -- a 50 percent premium. Even if the bid comes in near the $100 range an awful lot of Genentech long-timers will suddenly be looking at six-figure lumps that will make life on the golf course look a lot more inviting than a few more years wearing plastic eye goggles.

In sum, the events of the last 30 days potentially indicate that once Roche completes its takeover it will find that the Genentech it has bought consists entirely of brand-new employees whose bosses just left for greener pastures. In other words, the initial predictions made in the period immediately after the buyout (my BNET colleague David Hamilton suggested that Roche could be "killing the goose that lays the golden eggs" and Reuters was more speculative and more specific just one day after the announcement) are now backed by actual evidence.

Roche may only succeed by increasing its bid toward $50 billion, which is a very expensive way to buy empty real estate in the San Francisco area, particularly in this down market. Worse, every penny it adds in premium to Genentech's stock makes it more tempting for Genentech's best people to cash in and get out. The more likely Roche is to succeed, the hollower its victory could be.

It may be cheaper for Roche to keep its cash in the bank and continue to enjoy the 40 percent of its revenues that already come from its minority stake in Genentech. (Plus, that move would end the desperation at the Roche headquarters in New Jersey, which recently performed a kabuki-like show of support for the governor.)