The proposal covers the 44.1% that it does not own and values the company at 8.65% over its Friday closing price.

Roche is offering to buy the outstanding shares of Genentech stock that it does not already own for $43.7 billion. The company obtained a 55.9% stake in Genentech in 1990. A complete take over would create the seventh largest pharmaceutical firm in terms of market share and will generate over $15 billion in annual revenues, Roche reports.

While this is among the largest acquisition bids ever made, it values Genentech at only a 8.65% premium over its closing price on Friday; Roche says that it will pay $89 per share. Genentech’s stock is already climbing beyond the offer and opened today at $93.59 per share.

Genentech will convene a special committee of independent directors, who are not Roche employees, to assess the proposal. Many believe that the company is likely to push for more money, considering the low premium and the stock jump this morning. 

“The burden lies on the independent directors,” accordindg to Viren Mehta, Pharm. D., managing member of Mehta Partners. While they will naturally try for a higher number, Roche has done its due diligence and will be able to counter their arguments, he adds. “The likely outcome will lie somewhere in between.” Dr. Mehta believes that the per share proposal will definitely go up to three digits, and the only question is how much above $100 will it reach.

Dr. Mehta points out that there have been few, if any, deals similar to this and hence it is tough to compare the value of this acquisition to past takeovers. “At the end of the day, the price is in the eye of the beholder.” He reiterates that a combination of these two huge players will be telling of the times to come within the healthcare sector where big pharma not only turns to smaller pharmaceutical companies or biologic firms but also to mature biotechs.

The most obvious instigators for Roche’s decision to buy out Genentech are the weak U.S. dollar as well as Roche’s desire to be able to make decisions without needing the consent of the minority shareholders, notes Dr. Mehta. “Having to look after minority shareholders is always a contentious debate. It hasn’t been as easy to do things as both companies would have liked.”

Roche, who has already committed to pay $3.56 billion for Ventana and Piramed, will finance the Genentech transaction through a combination of its own funds and debt financing. The firm expects the combination to generate annual pretax cost synergies of approximately $750 to $850 million. It will also eliminate duplicative functions in areas like development, manufacturing, corporate administration, and support functions. The transaction is expected to be accretive to Roche’s earnings per share in the first year after closing.

With the planned takeover, a majority of Roche’s R&D activities will be based in the U.S. Genentech will operate as an independent research and early-development center within Roche from its existing campus in South San Francisco. Roche’s Palo Alto virology R&D activities will relocate to South San Francisco, while its Palo Alto inflammation group will become part of Roche’s Nutley, NJ, R&D organization. Nutley will also be the base for oncology and some metabolism programs.

Roche’s pharma commercial operations in the U.S. will be moved from Nutley to Genentech’s site in South San Francisco. The combined company’s U.S. commercial operations in pharmaceuticals will reflect the Genentech name, leveraging the strong brand value of Genentech in the U.S. market. The existing U.S. sales organizations of both companies will be maintained.

Genentech’s late-stage development and manufacturing activities will be combined with Roche’s global operations. Roche expects that this consolidation will achieve substantial scale benefits, operational synergies, and cost avoidance.

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