Bigger is not always better. Affymetrix still seems to be determined to be part of Thermo Fisher, sticking with its $1.3bn takeover bid in spite of a higher offer by Origin Technologies. Doubts about Origin, controlled by some former Affymetrix employees, include that it hopes to fund the $1.5bn purchase with debt from a Chinese private equity firm and that it “appears to be a newly formed shell entity with no assets of which Affymetrix is aware”, according to Affymetrix.
A shareholder vote is scheduled this week, and Affymetrix's management must hope that investors take a similarly long-term view rather than just grabbing the cash. The group’s share price rose 14% on Friday when Origin made its bid, but it was down 10% in morning trading today on news of the rejection.
It is theoretically possible for shareholders now to go against managment and refuse to approve Thermo's bid, especially if they are attracted merely by the prospect of more cash. Still, in pushing for Thermo, Affymetrix management must have taken the view of the biggest funds, so such a scenario seems unlikely.
But if it does arise then other buyers would be expected to take an interest in Affymetrix, a group that provides genetic tests used in various applications including drug development – this makes it conceivable that suitors could come from the pharma sector. Roche springs to mind: it tried and failed to acquire another genetic testing specialist, Illumina, in 2012.
Illumina itself could be another bidder – since Roche’s offer, rumoured to be worth up to $8bn, its market cap has grown to around $22bn, and it has cash to spend.
One area of overlap between Affymetrix, Roche and Illumina is noninvasive prenatal testing (NIPT), a method of diagnosing foetal genetic abnormalities that is seeing increasing interest. Affymetrix’s NIPT offering could tempt a diagnostic company that is not currently active in the space, like Danaher or Becton Dickinson – the latter just spun out its respiratory unit to focus on diagnostics (BD spin-out points to more private equity in medtech, March 11, 2016).
PerkinElmer, another diagnostics tools provider, bought Swedish NIPT specialist Vanadis in January, but it might be interested in Affymetrix’s other assets.
One group that looks unlikely to be in the frame is Abbott, which is currently acquiring Alere (Abbott pays $5.8bn to climb the diagnostics rankings, February 1, 2016). The transaction has been delayed, however, after Alere postponed the filing of its annual report and disclosed a US subpoena over its sales practices in Africa, Latin America and China.
Analysts do not seem to think that the developments are deal killers, but if it does fall through then Abbott could be shopping again.
Should a bidding war emerge Thermo would be forced to increase its bid from the original figure of $14 per share. It could afford to go up to $16.50 per share without materially eroding the return on invested capital, according to Leerink analysts.
Even at the original cost Affymetrix was pricey, at around 25 times trailing Ebitda, and synergies were the key to making it pay (Thermo kicks off 2016’s medtech megamergers, January 11, 2016).
The Leerink analysts note that while a $16.50 per share bid represents a premium of 30 times trailing Ebitda, the targeted $70m of synergies by the third year after the deal closes “effectively doubles Affymetrix’s Ebitda. Thus, the purchase price will ultimately look closer to 11 times Ebitda.”
The leaders of both Affymetrix and Thermo Fisher, however, will be happiest if the situation remains exactly where it is at the moment.