Shares in Shire (LSE: SHP) have fallen by as much as 6% today after the company announced that it has made a $30bn bid for US peer Baxalta. The initial contact between the two companies came almost a month ago but, with Baxalta’s management team apparently unwilling to negotiate or engage with their opposite numbers at Shire, the latter has decided to go public and give Baxalta’s shareholders their chance to voice an opinion on the merits of the deal.
The proposed acquisition sees Shire make an offer worth $45.23 for each Baxalta share, with it being made up of an all-share offer of 0.1687 shares in the new company that values Baxalta at a 36% premium to its 3 August valuation. Should the deal proceed, Baxalta’s shareholders would own around 37% of the new company’s share capital and, according to Shire, a share buyback of up to $10bn would be launched soon after the takeover in order to improve earnings per share.
Clearly, a deal is still some way off, with the two management teams not having spoken besides an initial meeting and, with Baxalta’s CEO stating recently that he felt there was no merit to further discussions, an agreement may not be reached.
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However, the reasons given by Shire in favour of the proposal appear to be rather sound. For example, it would provide Shire with a range of promising new products to add to its already impressive stable of treatments for rare diseases. As such, Shire’s revenue could reach as much as $20bn by 2020 and create the world’s major rare diseases specialist. It could also create considerable synergies, as well as tax advantages for both sets of shareholders. And, with Shire having a track record of successfully integrating major acquisitions in recent years, the company has good form when it comes to engaging in M&A activity.
Looking ahead, it is impossible to know how Baxalta’s management team and its shareholders will respond to the approach by Shire. And, while Shire’s CEO has stated that he would prefer to negotiate with Baxalta’s management team rather than go directly to shareholders, a hostile takeover could be on the cards. As such, the short to medium term could be relatively unsettled, uncertain and volatile for investors in both stocks.
However, investing in Shire, with or without the Baxalta deal being agreed, appears to be a very sound move. It remains a company with huge long term potential, as highlighted by its goal to double revenue within the next five years. And, while its shares have fallen today, they are still up by 20% since the turn of the year. Despite this, though, they still offer excellent value for money – as evidenced by their price to earnings growth (PEG) ratio of just 1.2. Therefore, they appear to be well-worth buying and look set to deliver excellent long term growth for investors who can cope with above-average volatility in the shorter term.
