Illumina: Buying, Selling, or Riding Solo?

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Illumina (NASDAQ: ILMN) has definitely been at the center of some of the stranger acquisition rumors of the last year. Though these rumors have made the stock volatile, it has outperformed. However, the speculation might have much more clarity after news on Sunday indicates that Roche (NASDAQOTH:RHHBY) will no longer be looking to buy the company.

In a nutshell, here’s the story with Illumina: The company is for sale then its not for sale; the company has agreed on a purchase price, but then it wants more money; the company then looks to acquire a company, but then goes back on the selling block! It’s safe to say that investors have been on a wacky ride, and it’s hard to say what will happen next.

Who’s Looking to Buy Illumina?

For the last year Illumina has been in talks with Roche about a potential acquisition. The two parties have come close at times, but the deal always seems to fall apart at the last moment. However, in the last week of December, a newspaper in Switzerland reported that Roche was close to striking a deal to buy Illumina for $8.1 billion, or $66 per share.

Since the news of “close” deal, shares of Illumina have rallied nearly 6%. However, do to the past, analysts have remained somewhat skeptical that the deal would get done. Turns out these analysts were correct, because on Sunday Roche Chairman Franz Humer said, “Illumina is definitely off the table!”

According to Humer, Illumina was not willing to abandon their totally unrealistic asking price. Therefore, it seems that Roche has finally had it with this company and will look elsewhere for gene-sequencing technology. If in fact $66 was the asking price, then I find it somewhat concerning that the cash rich company (Roche) would not be willing to purchase Illumina for a price/sales of 8.0 and a P/E ratio of nearly 90.0. Furthermore, Roche’s use of “totally unrealistic” to describe Illumina’s asking price might indicate slowed growth or other operational concerns.

Illumina Looking to Buy?

Perhaps Illumina is just playing hard to get, and perhaps Roche’s statement was an attempt to force Illumina to entertain a lower offer. Roche obviously wanted to purchase Illumina, but the two sides appear far from reaching a deal. Therefore, the rumors that have led to Illumina’s gains over the last year, might lead to significant selling pressure throughout the day on Monday.

With all things considered, I think Illumina will now begin to look to add to its pipeline with an acquisition of its own. Last year the company made a bid for Complete Genomics (NASDAQ: GNOM), however the company rejected its offer in November. Therefore, the stage was set for BGI-Shenzhen to come in and scoop up the small cap biotech company. And on Dec. 31, Complete Genomics said that it obtained clearance for the proposed acquisition from BGI. Therefore, it appears that Illumina’s “Plan B” is off the table, and if it’s looking to acquire, then it will have to think outside box.

How to Play it

The situation with Illumina, whether it’s being acquired or acquiring, is confusing. For the first time the speculation surrounding this company appears to be at a standstill, as both Complete Genomics bid ends on January 7; the same day that Illumina will be hit by the Roche news.

With all things considered, regardless if Illumina is looking to buy another company or be acquired itself, the newly found clarity might present opportunity for investors. This is a company that is expected to more than double its bottom line growth in 2013; with a forward P/E ratio of 30.76. It has significant top-line growth, rising margins, and a blockbuster line of products. Therefore, if the stock pulls back, then it might be a good opportunity to buy, as the stock does not seem too expensive. Then, at that point, you should expect a re-emergence of rumors and speculation, which could once again lead to a continuation of its rally. 

BrianNichols has no position in any stocks mentioned. The Motley Fool recommends Illumina. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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