Gen-Probe (Nasdaq:GPRO) shareholders enjoyed a nice pop in late April when this diagnostics company announced that it was considering a sale. Those easy gains proved short-lived, though, as the stock gave up a lot of that jump when rumors started spreading in early June that the sale process had not been going well and there was only one interested party still in the bidding. (To help you determine if a stock is popping or if the entire market is moving, read Gauging The Strength Of A Market Move.)
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Missing the quick and low-risk payday of a buyout would certainly be disappointing to some investors, but shareholders should not be too worried about this turn of events. While it would be discouraging to consider the idea that other companies do not see a lot of must-have value in Gen-Probe's business, there are other interpretations available. All in all, it may prove to be the case that life sciences companies look back on this opportunity with regret and shareholders ultimately benefit from the ongoing independence of Gen-Probe.
Last Man Standing?
When Gen-Probe initially put itself on the block, there was the collection of usual suspects in the mix as possible bidders. Gen-Probe's partner in the blood-screening business Novartis (NYSE:NVS) was on almost everyone's list, as were names like Abbott Labs (NYSE:ABT), General Electric (NYSE:GE), and a host of life sciences players like Thermo Fisher (NYSE:TMO) and Life Technologies (Nasdaq:LIFE).
If recent rumors are to be believed, though, that list has winnowed itself down quickly. Thermo Fisher likely took itself out of any consideration with the acquisition of Dionex, and other potential buyers like Danaher (NYSE:DHR) may be on the sidelines for similar reasons (while a company like Becton Dickinson (NYSE:BDX) would have antitrust problems). All in all, if the reports are to be believed, Novartis is the only company that is in the ring with a serious bid. (To learn more on how companies are bought and sold, check out Mergers And Acquisitions: Understanding Takeovers.)
Would a Deal Make Sense?
For Novartis, there would be some solid logic to a deal for Gen-Probe. The blood-screening business that the two companies share is not high-growth, but it's profitable and reliable. Moreover, diagnostics is an area where Novartis is notably lacking. Gen-Probe would bring immediate credibility in areas like HPV testing, molecular diagnostics (MDx), and STD testing, to say nothing of the future potential of additional MDx tests and personalized medicine (developing diagnostic tests to identify patients most likely to benefit from certain medications).
Of course, there is always a "but" in these conversations, and the "but" in this case is the valuation. Novartis would have to pay a pretty rich valuation for Gen-Probe and that may test the patience of shareholders a bit too far, as Novartis arguably still needs to demonstrate that it can deliver the promised results from past deals. (To help you determine to see if the Gen-Probe is a good deal, read Equity Valuation In Good Times And Bad.)
Going It Alone Not So Bad
It is not too hard to imagine that a hang-up in the Gen-Probe sale process revolves around the above-average uncertainty in the business. Gen-Probe is in many respects a company in transition, and companies may be unwilling to pay a large premium ahead of significant events like the U.S. launch of the new Panther platform and new assays in markets like prostate cancer and HPV. By the same token, maybe buyers want more assurance that Gen-Probe has a durable competitive advantage against the likes of Hologic (Nasdaq:HOLX) and Becton.
The good news for investors, though, is that Gen-Probe has made good deals in the past and has a solid growth outlook for the next three to five years. If new product launches go to plan, the stock should do at least as well as the market and if management can deliver some upside, the stock will do even better. Better still, buyers that are nervous today may be willing to come back later and pay a higher price for a little extra certainty.
The Bottom Line
Shareholders should certainly feel some disappointment that a sale seems less likely (or at least a bidding war), but it is probably better in the long run for the company to go its own way than to sell too cheaply just to get a deal done. What's more, the world of med-tech M&A is a strange one and unexpected bidders have a way of showing up (perhaps Johnson & Johnson (NYSE:JNJ) decides it just has to revitalize its diagnostics business, for instance). All in all, while Gen-Probe is not a terrifically cheap stock today, it's a solid company worth holding as an emerging player in growth markets like molecular diagnostics. (To learn more about the world of merger and acquisitions, check out Mergers And Acquisitions: Understanding Takeovers.)
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