Genzyme's Defense Against Hostile Sanofi Takeover Is Time
Stock Chart for Genzyme Corp (GENZ)
Sanofi made a $69-a-share tender offer Oct. 4, after Cambridge, Massachusetts-based Genzyme spurned that bid as too low and refused to negotiate. Genzyme no longer has a poison pill to dilute any stake Sanofi gains. It also changed its charter to re-elect all directors annually, making the board vulnerable to complete replacement by a majority shareholder.
Massachusetts law still provides a protection: it requires board approval even after a tender offer succeeds, said Mark Schoenebaum, an analyst with ISI Group Inc. Should Genzyme refuse to clear a deal, Sanofi couldn’t attempt to replace the directors until an annual meeting in mid-2011. That gives Genzyme time to show progress in fixing manufacturing defects that slashed drug sales, and to show the promise of up-and- coming experimental treatments, said Les Funtleyder, an analyst with Miller Tabak & Co.
“It’s in Genzyme’s interest to stretch out the process a bit,” Funtleyder, who is based in New York, said in an Oct. 6 telephone interview. Genzyme’s stock has a floor of $69 as long as Paris-based Sanofi’s offer remains on the table, he said. “Two things could happen: bad things, and you still have a $69 offer, or good things, and the value of Genzyme goes up.”
The stock has traded above Sanofi’s offer every day since it was made on Aug. 29, suggesting Genzyme Chief Executive Officer Henri Termeer has investors on his side in holding out for a higher bid. Genzyme rose 61 cents to $72.36 at 4 p.m. New York time in Nasdaq Stock Market composite trading.
Genzyme urged investors not to act on Sanofi’s offer until after it reviews the proposal with financial and legal advisers. Genzyme said in an Oct. 4 statement that it would make its recommendation within 10 business days in a regulatory filing.
“I am sure that Termeer will defend his shareholders until the last cent,” said Amit Shabi, co-manager of Bernheim, Dreyfus & Co.’s Diva Synergy Fund, an event-driven fund focused on acquisition targets that owns Genzyme shares. “So we trust him. And he’s right not talking to Sanofi at this price.”
Shabi, based in Paris, said he would “happily sell at $80, and with regrets at $76.” At $69? “Never.”
Justify a Boost
Termeer will likely keep refusing to negotiate until Sanofi increases its bid, Shabi said. Sanofi CEO Chris Viehbacher said the company would be willing to raise its offer if Genzyme provided details to justify a boost.
Genzyme’s stock sank as much as 43 percent from a 2008 high of $83.25 after a viral contamination at its plant in Allston, Massachusetts, caused shortages of top-selling drugs Cerezyme and Fabrazyme. The company, the world’s largest maker of medicines for rare genetic disorders, told Sanofi in August that its offer didn’t recognize progress in resolving production issues or the potential for its pipeline of experimental drugs.
Termeer, by declining to negotiate, “is buying some time to look for a white knight,” Shabi said, citing Indianapolis- based Eli Lilly & Co. as another potential bidder.
Lilly bought ImClone Systems Inc. in 2008 in a deal orchestrated by billionaire investor Carl Icahn after an unsolicited, lower bid from Bristol-Myers Squibb Co. Lilly CEO John Lechleiter has said repeatedly the drugmaker isn’t seeking large acquisitions or a combination even with pending patent expirations on several top-selling drugs in the next few years. Lilly spokesman Mark Taylor said the company’s policy is not to comment on market rumors and deal speculation.
Icahn, one of Genzyme’s top shareholders, controls two seats on the biotechnology company’s board.
“Any shareholder worth their salt would love to see another bidder come in,” said ISI Group’s Schoenebaum, who is based in New York, in an Oct. 4 telephone interview.
Termeer’s time isn’t limitless, said Phil Nadeau, an analyst with Cowen & Co. Short-term investors who got into the stock based on the sale potential will gradually step up pressure on Termeer to start talks with Sanofi, Nadeau said.
“Investors realize that if they play too hard to get, if Sanofi were to walk away, the stock would fall well below $69,” Nadeau said in an Oct. 5 telephone interview. “Over time, pressure will increase on Genzyme’s board to turn this into a friendly situation.”
At the urging of institutional investors, Genzyme changed its charter in 2006 to put its entire board of directors up for re-election every year. The company let its so-called poison pill expire in March 2009, losing the protection of a provision that gives shareholders the right to buy new stock at a discount and dilute the stake of a hostile bidder.
The moves fit with a trend of companies shifting power to investors and away from management, said Paul Regan, associate professor at Widener University School of Law in Wilmington, Delaware.
“The directors have fiduciary duties to the company and stockholders to act in an informed way and in a loyal way,” Regan said by telephone Oct. 4. They need to do “what’s best for stockholders, not jobs for management -- that’s the obligation.”
The deal would be the biggest hostile takeover in the drug industry since the transaction that created Sanofi-Aventis in 2004, according to Bloomberg data. Sanofi-Synthelabo acquired Aventis for about $64 billion after raising its bid once. Sanofi has announced 35 acquisitions in the past five years, with an average size of $1.6 billion and an average premium of 15 percent, according to data compiled by Bloomberg.
Sanofi said Oct. 4 that BNP Paribas SA, JPMorgan Chase & Co. and Societe Generale SA agreed to provide loans of $15 billion to help finance the takeover bid. Its tender offer expires Dec. 10.
That’s longer than the typical tender offer period of about 20 days, indicating Sanofi expects a drawn-out timetable, according to a person familiar with the situation who spoke on the condition of anonymity.
Genzyme’s filing in response to the proposal, if detailed and lengthy, may suggest that the biotechnology company is under pressure from hedge funds and other short-term investors to consider a sale, said the person, who declined to be named because the deliberations are private.
Sanofi’s lead financial advisers for the transaction are Evercore Partners and JPMorgan, and its legal adviser is Weil, Gotshal & Manges LLP. Genzyme’s financial advisers are Credit Suisse Securities (USA) LLC and Goldman, Sachs & Co., and its legal adviser is Ropes & Gray LLP.
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