Wednesday, November 14, 2007

Ventana Plays Ball

Chris Gleeson, the CEO of Ventana, must be one heck of a poker player. After rebuffing Roche's hostile $75-a-share price offer four times, his company announced in after hours trading that it had accepted a confidentiality agreement from the Swiss pharma, giving the drug giant access to the non-public information.

The hope, of course, is that once Roche execs get inside Ventana's data room that they will come to their senses and realize how grossly inadequate--insulting,even--was their original offer. Or as the press release states:

Ventana's Board believes that the due diligence conducted by Roche and related discussions that will accompany the due diligence process will allow Roche to recognize the significant additional value inherent in Ventana's business.

But that doesn't mean the company believes Roche's original offer was in any way fair. The release goes on to say:

Ventana’s Board of Directors reiterated that Roche’s $75 offer is grossly inadequate and not an appropriate starting point for negotiations as reflected by that fact that Ventana’s share price has consistently traded well above Roche’s offer and our stockholders have overwhelmingly rejected that offer four times. Furthermore, the Board continues to believe Roche’s offer does not appropriately compensate Ventana’s stockholders for the inherent value of the Company or its synergistic value to Roche.

The news of a confidentiality agreement comes at an odd time. After all, in mid-October, the company reported a 28% increase in its third quarter revenues, widely beating analyst expectations, thanks to strong sales of its tissue-testing products. And even if Roche hasn't seen the light, the company's shareholders have converted: according to an October 29 press release, less than 0.2% of the Ventana's 35 million outstanding shares had been tendered to Roche after the third extension of the original hostile offer. Which leads this IN VIVO blogger to wonder: why bother playing nice at all?

Maybe because the company can't afford not to. Despite strong revenues, Ventana's third-quarter net income was tiny--just $263,000 or 1 cent per share. Compare that to last year's third quarter results, where the company reported net income of $7.8 million, or 22 cents per share. Listen to the webcast of the company's earnings call and it's not hard to find the reason for the drop: $12.5 million in special charges that included hefty legal fees to fight off Roche's takeover bid. Clearly that fight is starting to take a financial toll--a scenario we partially envisioned back in August.

And with no end to the fight in sight, no White Knight emerging, and a direct hit to the bottom line, Ventana's board must have seen the writing on the wall. Continue to resist and risk continued hits on earnings--a scenario which could drive investors away and the send the share price on a downward spiral that would put pressure on them to accept Roche's original offer. (Roche's strategy, by the way, is outlined in this IN VIVO piece from this past summer.) Their best hope, then, of convincing Roche to sweeten the pot was to show them why Ventana is worth the money--and that means giving them access to the data room and the people inside.

In other words, you should listen to your mother. You can catch more flies with honey than vinegar.

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