|
|
|
|
||
Illumina Should Heed Carl Icahn, Give Up on Grail; Management needs to seek settlemenIllumina Should Heed Carl Icahn, Give Up on Grail; Management needs to seek settlement leading to speedier exitWainer, David. Wall Street Journal (Online); New York, N.Y.Many of Illumina's shareholders have grown increasingly frustrated with Chief Executive Francis deSouza's pursuit of Grail. The decision to close the $7.1 billion acquisition in August 2021 despite regulators' objections baffled many investors and is largely to blame for cutting the company's market capitalization in half. Grail, which makes cancer-detection tests, lost about $600 million last year, cutting into Illumina's profit. On top of that, Illumina, which makes genetic-sequencing products, has set aside $453 million for fines it might incur from European regulators for closing the deal before obtaining regulatory clearance. That is a huge financial drag from a company it could be forced to dispose of for a fraction of the purchase price. Illumina has taken a $3.9 billion write-down to reflect that possibility. While Illumina is still appealing European jurisdiction over the transaction, many investors have been begging the company to call it quits. Activist Carl Icahn just waded into that sea of shareholder discontent. Earlier this week, he launched a proxy contest, claiming in a withering letter that management has engaged in reckless actions. Mr. Icahn, who owns 1.4% of the company's shares, nominated three people to the board. In a second letter on Wednesday, he specified that his goal is forcing the divestiture of Grail. Whether all three of Mr. Icahn's nominees will ultimately get board seats if a vote happens later this year is a question Illumina's management would be wise not to find out. Instead, a settlement that gets what many investors and regulators want makes more sense. Dan Brennan, an analyst at TD Cowen, says any action that increases the certainty of exiting Grail in a timely fashion, provided it doesn't materially disrupt the underlying business, would be welcomed by the investors he has been speaking with. Mr. Brennan acknowledged there are likely shareholders out there who want to hold on to Grail, though he noted he has yet to meet any. About 80% of proxy battles generally settle, and that is likely to continue given recent SEC rule changes mandating the use of a universal proxy card that might make it easier for dissidents to get one or more of their nominees elected, says Elizabeth Gonzalez-Sussman, vice chair of the activist practice at law firm Olshan Frome Wolosky LLP. One potential settlement could include forming a committee, chaired by an Icahn appointee, to oversee a Grail divestiture, she says. "Icahn is a prolific activist and I think he's going to put pressure on the company, and stockholders may push to see a deal getting done," Ms. Gonzalez-Sussman said. Responding to Mr. Icahn, Illumina wrote this week that his letter "neither recognizes the real value that Grail can provide to Illumina's shareholders, nor reflects an understanding of the regulatory process." It stated the company "is moving as quickly as possible to arrive at a resolution, with divestiture work already under way in advance of the European Commission's divestiture order," adding that it expects "to execute a divestiture based on the terms of the final order…unless Illumina wins the jurisdictional appeal meanwhile." An Illumina shareholder could be excused for being a little confused by the company's messaging. It is both preparing for an exit and fighting to keep Grail. A clearer commitment to an exit at this point is what is needed to right the ship. Illumina's shares rose 17% on Monday following Mr. Icahn's announcement, highlighting what is at stake. "I think the message is pretty clear. It's time for management to walk away from this bad deal," says Les Funtleyder, a healthcare investor at E Squared Capital Management who owns shares directly in Illumina. To be fair, there might still be some investors who believe in the long-term prospects of Illumina's combination with Grail. Baillie Gifford, a growth investing firm, holds more than 10% of Illumina's stock and has yet to make any statements on the situation. The firm declined a request for comment. Polen Capital, another shareholder, didn't reply to a request for comment but in late 2021, it wrote that the deal would eventually strengthen Illumina's core business . The problem for many investors, though, is that even if the Grail acquisition pays off some time down the line, it has currently made Illumina uninvestable for many, explains Kyle Mikson, an analyst at Canaccord Genuity. Illumina dominates the highly lucrative DNA sequencing market, where it holds about an 80% share. That business model typically attracts a certain kind of investor interested in the attractive business of medical tools. Grail, while promising, is unlikely to be profitable for years to come and currently reduces earnings per share by about 50%, deterring those types of investors, says Mr. Mikson. It is time Illumina gave up on its 'holy' Grail. |
return to message board, top of board |