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Roche's Illumina Bid May Start War

NEW YORK ( TheStreet) -- With news breaking late on Tuesday of Roche's hostile $5.7 billion offer for Illumina (ILMN - Get Report), M&A watchers would be wise to remember a similar-sized deal that eventually turned a hostile and resulted in a new buyer and a 20% price increase.

In March, 2011, Valeant Pharmaceuticals (VRX) took a $5.7 billion bid for Cephalon directly to the company shareholders after management called the offer "opportunistic" and talks stalled. The move caused shares to surge above the $73 a share bid price.

While the bid eventually failed , optimistic investors were vindicated by a $6.8 billion competing bid from Teva Pharmaceuticals (TEVA), which valued the company at $81.50 a share.

That same dynamic may play out in Roche's offer for Illumina.

Illumina shares rose nearly 43% to $53.89 in afternoon trading, roughly 20% more than Roche's $44.50 a share bid, indicating that investors expect an increase. While Roche's offer may be "opportunistic" as Illumina's management argues in a statement, the share surge could reflect an expectation that other suitors will enter the bidding fray now that the process is public.

"We are increasing our price target for Illumina to $49.50 to reflect the potential for a broader sale process following Roche's recent announcement of a hostile bid," wrote Deutsche Bank analyst Ross Muken in a Wednesday note. Price target increases by analysts across Wall Street pegged Illumina's value as high $70, citing the potential for a bid increase and an overall need to boost earnings multiple-based valuations for the San Diego-based genomics and diagnostics specialist.

The big story of the day is what will happen with Roche's bid. As the Illumina management weighs whether it will recommend the offer to its shareholders, other interested parties could jump in and push up the offer price.

Siemens (SIE) and Johnson & Johnson (JNJ) have been previously reported as having complimentary operations to Illumina's the diagnostics and genomic sequencing businesses, says Muken of Deutsche Bank in a follow up conversation. "Given Illumina's unique strategic nature, there are probably a reasonable number of companies that might be attracted to it," he adds, citing the importance of the company's machinery to genomics based research and the potential for use of them in patient cancer diagnostics that could drive double digit sales growth.

"Periods of M&A in the space of diagnostics and tools come in waves," notes Muken. While development of speedier and lower-cost genomic sequencing machinery faces typical research and development risks, Muken adds that it's less of a risk as oncology and cancer drug development R&D risks, potentially leading to a diverse interest from the likes of Siemens, Johnson & Johnson, in addition to Abbott Laboratories (ABT), Becton, Dickinson (BDX) and Philips Research.

If a new bidder were to emerge, Roche's hostile offer could mirror the bidding war that Valeant and Teva waged for Cephalon, which yielded a $6.8 billion merger and a 20% premium to the initial offer. To be seen is whether any new parties will step into the fray for Illumina or at what premium.

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For more on Illumina shares, see "8 biotech stocks to watch.

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