Top Stories: Arris-Sequana Merger Vote Coming Down to the Wire
By Jesse Eisinger
Staff Reporter
1/6/98 2:00 PM ET
Arris (ARRS:Nasdaq) management is scrambling to win votes for its unpopular merger with Sequana (SQNA:Nasdaq) before Wednesday's scheduled shareholder meeting, according to investors.
But Arris says the vote is going fine and that it is overwhelmingly in favor of the merger. Arris pshawed any rumors about trouble. "We are in fabulous shape. In fact, the only votes against the merger are [Biotechnology Value Fund manager] Mark Lampert and a very, very small number of other votes. We may already be there and it's by an overwhelming majority," says Shari Annes, head of investor relations.
Sequana spokesman Bob Giargiari says that "everything is on schedule and going through."
Despite the calm demeanor of the couple, there is widespread disenchantment with the merger. "Management is really enthusiastic. We don't quite share the enthusiasm. But at the end of the day we are going to vote yes," says Sven Bohro, an analyst for newly formed Orbimed Advisors, which through three funds controls, he said, about 700,000 shares. Despite his lack of enthusiasm for the deal, he fears that key Arris managers might leave if the merger doesn't go through.
Any postponement or delay in the voting would be perceived as a bad sign that the company didn't have the votes for the merger. What a postponement or delay would mean for the stock isn't clear. But after taking a huge hit since announcing the merger, down 29%, Arris probably would go up if the marriage is scuttled. Sequana is essentially flat, though the stock jumped 29% on the initial merger news before slinking back to its pre-deal price. Investors say Sequana's stock may drop if the deal is dropped.
"Overall, our take is that our investors do recognize the value of the combination on a long-term basis," says John Walker, president and chief executive of Arris. He attributes the stock decline to arbitrageurs shorting Arris and going long Sequana, a standard investment strategy. He adds that selling pressure from Lampert's fund and concern about Sequana's reputation, which he sees as unfounded, also hurt Arris shares.
"Sequana's reputation was not what we would have liked. Scientifically, Sequana had a very good reputation, but it was overshadowed by issues of business management," says Walker. Those issues have been addressed, he says, noting that Arris will pick up the management slack. Also, Walker says he's very encouraged by a deal Sequana signed with Parke-Davis, the research unit of Warner-Lambert (WLA:NYSE).
Asked whether the merger would go through, Walker says: "We do expect it to occur. The value created here is a company not worth $200 million to $300 million but clearly a company worth $500 million to $600 million."
Arris needs 50% of its shares outstanding as of record date Nov. 24 to vote "yes." Annes says institutions hold between 70% to 80%.
The opposition, led by Mark Lampert's San Francisco hedge fund, the Biotech Value Fund, is hoping that enough institutions vote "no" or abstain from voting, which effectively is a "no" vote. The Biotech Value Fund is voting its 6.1%, or 924,00 shares, against the merger.
Fidelity, whose biotech portfolio manager didn't return a call, is rumored to be voting its shares against the merger. Annes says Fidelity hasn't voted yet. Fidelity owns 1.07 million shares, according to an investor.
The opposition says that, by its count, 20% to 25% of the institutions are voting against the merger, as of early in the week, but Annes denied that out of hand. "I can honestly tell you, the rumors are wrong. We have also heard certain institutions considered voting against but the numbers suggest they made their decisions to vote for."
Zesiger Capital is voting "yes." Andrew Zachs, the portfolio manager, is a vocal proponent of the deal. "I'm in favor. I think it's a great deal. I think it'll go through with no problem," he says adding "I took advantage of the stock [decline] to buy a lot more Arris."
Yet Zacks is one of the few holders who is openly enthusiastic. Speaking off the record, three portfolio managers voiced serious reservations about the deal and Arris management, particularly Walker. Even if the merger goes through, people will be unhappy.
"Everybody doesn't quite understand the deal," says one shareholder who controlled about 450,000 shares as of Sept. 30. But "its very difficult to go in there and deeply second-guess management," he said, without commenting on how he would vote. Nevertheless, he has a bad taste in his mouth: "Did management believe when it made the announcement that the stock would go up, or at least stay the same? Where were the advisers? Where was everybody?"
The argument for the merger is that Sequana gives Arris the capability of developing therapeutic candidates "from gene to the drug." The combined new company, management argues, would be an attractive partner similar to powerhouse Millennium Pharmaceuticals (MLNM:Nasdaq).
The opposition charges that CEO Walker simply got fed up with his underperforming stock, and was envious of MLNM's half-billion market capitalization. Investors also say that Walker dramatically miscalculated, thinking the stock would go up, not down, after the merger announcement.
Angry investors fear that Arris has bought a cash sinkhole and delayed its own clinical progress. The merger proxy statement states that Sequana will account for 47% of cumulative revenues of the new company, to be called Axys Pharmaceuticals, until 1999, but make up 73% of the operating losses.
Lampert says that "the deal they struck was incorrect. There is no argument to pool past programs," because Arris was further ahead on its projects and they were more valuable than Sequana's. A valuation on future projects and a joint venture arrangement would have been better for Arris shareholders, he says |
