2012 Deals Hinge on Goldman Sachs' Idea of 'Fairness'
A flurry of recent high-priced bids from big-league buyers such as Roche, Martin Marietta (MLM) and Carl Icahn have all been given the thumbs down by Goldman as the Wall Street bank offered less than favorable "fairness opinions" on the bids.
While shareholders are the ultimate arbiter whether a bid is fairly priced, those deals reveal that Goldman Sachs is becoming more vocal on M&A prices and the management of the targeted companies are more than happy to use Goldman's word to scuttle a deal in hopes of a higher offer or an earnings recovery.
A fairness opinion is given by an investment bank as an independent analysis that should help shareholders sort between what is a fairly valued bid and what is opportunism.
So far, Goldman has seen a lot of opportunism. In three of the largest hostile offers of 2011 and early 2012, Goldman Sachs investment bankers have urged company managers and shareholders to turn down bids, with the expectation that either share price gains or a stronger offer would be available in the future.
The near $5 billion recent hostile offers for both genomics machinery maker Illumina(ILMN) by Roche and Construction aggregates giant Vulcan Materials (VMC) by Martin Marietta were considered "inadequate" by Goldman Sachs.
In each case, Goldman's opinion spurred management to reject an offer to often messy but still uncertain results.
After German pharmaceuticals giant Roche offered Illumina $44.50 a share in January, analysts and investors reacted to the bid by signaling that a bidding war might emergy for the company among large players like Johnson & Johnson (JNJ) and Becton Dickinson (BDX) , pushing shares far higher. Nevertheless, Roche maintained that its bid represented an over 60% premium to Illumina's shares prior to deal rumors and stated that it wouldn't increase the offer.
In February Illumina enacted a poison pill to thwart Roche from building a large share stake and it rejected the unsolicited offer, citing a fairness opinion from Goldman Sachs showing the underpricing of the takeover bid. Some shareholders are now suing Illumina for not further considering the bid, while reports indicate that Roche may extend the tender offer that's set to expire on Feb. 24.