And this interesting article probably belongs here as much as in the Munch thread:
Reuters
Merger Talk: Are cash-rich biotechs now sitting ducks?
Monday October 28, 4:40 pm ET
By Dane Hamilton
NEW YORK, Oct 28 (Reuters) - Having stacks of cash may seem like a good thing for U.S. biotechnology companies. But cash also attracts attention of an unwanted sort -- from corporate raiders whose aim is to shut them down for it.
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Slammed by the struggling stock market and costly drug development failures, some 20 percent of the 400 or so publicly traded U.S. biotech companies are trading below cash, according to Burrill & Co., a West Coast biotech bank. That means their share prices don't even reflect their cash or liquidation value, much less prospects for drugs.
For some -- particularly those "fallen angels" whose lead drugs have failed -- there is a huge disparity of cash to share price. That has forced former biotech stars to look for merger partners to avoid takeovers, experts say.
ViroPharma (NasdaqNM:VPHM - News), for instance, has a market cap of $23 million at its current share price of 89 cents. Yet it has $200 million in cash, which translates into $8.83 cash per share.
Similarly, Maxim Pharmaceuticals (NasdaqNM:MAXM - News) has $116 million in cash, but a market value of nearly half that: $67 million. And Praecis Pharmaceuticals (NasdaqNM:PRCS - News) is valued at $132 million by the market, has cash of $238 million. The same applies for Pharmacyclics (NasdaqNM:PCYC - News) and a dozen other biotechs that experts say may be "sitting ducks," trading well below liquidation values.
"When their market prices are at or below book or cash value, it does make them ripe to be a target," said Carl Metzger, an attorney with Testa, Hurwitz & Thibeault, which represents venture-backed companies.
"Anyone in that position may view themselves as being on a watch list," he said.
Targeting cash-rich companies with the intent of shutting them down and taking the cash isn't for the faint of heart. These companies can put up quite a fight and typically install antitakeover provisions to ward off hostile bidders.
Still, some investors appear willing to take on these battles, particularly where it can be shown that a company's management has obviously failed to deliver and the payoff is too hard to resist.
"We're looking at one right now," said Tim Bacci, managing director of Walnut Creek, California-based activist fund BlueLine Partners, referring to one unidentified cash-rich biotech that is trading below cash. Bacci said he may seek to dissolve the company and return cash to shareholders or recapitalize it if it has "a viable business plan."
Last month, BlueLine made an unsolicited $71 million offer for Vicinity Corp. (NasdaqNM:VCNT - News), a California software company with some $83 million in cash on its books. The $2.65 per share offer was rejected, but it wasn't long before Vicinity found a buyer: Microsoft Corp. (NasdaqNM:MSFT - News) agreed on Oct. 22 to acquire the company for $96 million, or $13 million more than its cash.
"We put this company into play, forcing it to look at other offers," said Bacci, who now holds some 7 percent of Vicinity stock and supports the Microsoft offer. "We want to do what's in the best interest of shareholders."
Experts say it's almost inevitable Bacci and others will succeed in some cases, despite "poison pills" and other obstacles that companies may put up to avoid losing control.
INSIDER LBOs
In a typical leveraged buyout, takeover artists borrow money to buy undervalued companies and use the target's cash flow to pay down debt. Such deals are usually friendly, or negotiated, transactions.
But under the evolving "insider LBO" concept, cash on a target company balance sheet may be used to immediately pay off acquisition debt, making short-term loans possible for such transactions. Some experts call them "bridge loan LBOs."
Furthermore, even if the target company rejects takeover overtures, the sheer disparity between the book value of some companies and their market price may make costly hostile takeover battles worthwhile -- for a small number of thick-skinned market specialists with a taste for bare-knuckle fights for control.
"It can be a very nasty business," said one New York merger arbitrageur, a specialist investor who bets on the prospects for transactions being completed. "Target companies will drag you through the mud and try to dig up stuff on you. Many investors don't want their names in the press for those kinds of battles."
Such mudslinging took center stage this year when Texas billionaire Sam Wyly spent millions of dollars to try to win seats on the Computer Associates International (NYSE:CA - News) board, a move that ultimately failed although Computer Associates paid $10 million in "greenmail" to make Wyly go away. Now some biotechs may face similar prospects, according to experts.
And while many cash-rich biotechs have put in place antitakeover provisions like "poison pills" and "staggered boards," these provisions aren't "bullet-proof," say experts.
"Poison pills can be challenged and are not all created equal, although they can serve as significant deterrents," said Testa Hurwitz's Metzger. Some courts can toss out poison pills if their sole purpose is to entrench management, say lawyers.
And while target companies can put up a serious legal fight, the biggest pressure for capitulation may come from established shareholders themselves, particularly for companies whose key drug in development has failed.
Vulnerability worries are prompting an increasing number to look to join forces with former rivals, said Eric Roberts, Lehman Brothers' co-head of global health care investment banking.
"A number of the fallen angel public companies and a large number of private companies have decided since Labor Day to start looking at mergers and acquisitions as an option," said Roberts. "These managements need to be thinking about what's in the best interests of shareholders." |
