Illumina And The Importance Of Listening To The CEO

When the CEO of a public company speaks, it is often a good idea to hear what he or she has to say. Their commentary will often yield clues as to where a company is going, and what its stock performance could look like.

The importance of listening is amplified many times when the CEO in question states openly that the company has no desire to be independent. Illumina's CEO was recently interviewed by Bloomberg, and their conversation touched upon a variety of topics, including Illumina's (ILMN) growth prospects in genomics.

But, what we found most interesting were his comments regarding M&A. Illumina's CEO Jay Flatley stated openly that the company does not have an entrenched view that it needs to be independent in order to succeed, which implies that there is a price at which the company would agree to a takeover. Flatley stated that Roche's hostile takeover attempts tied the board's hands regarding their ability to discuss a price at which they would agree to a deal. Comments like that imply that Illumina's board has a price, and that a potential acquirer simply needs to offer enough money to take control of the company.

Furthermore, Illumina's investor base is quite concentrated, with just 7 investors owning over 51% of the company. Morgan Stanley holds a crucial 10% stake, and we do not think that the investment bank has any particular loyalty to Illumina's management. They will support a deal if it gives them an adequate return on their stake. In addition, Illumina's takeover defenses suffer from a major flaw, a flaw that Roche has exploited, and a potential acquirer could exploit again. Illumina has a staggered board, and that provision is written into its corporate by-laws, which means that it can be changed only by the consent of both a majority of Illumina stockholders AND the board. But, the size of Illumina's board is written into its corporate charter, which can be changed with the consent of a majority of investors. Ina given year, an acquirer can simply gather a majority of Illumina's investors to their side, nominate directors for the existing seats up for re-election, and propose to expand the board, filling it with pre-selected candidates, thus gaining control of Illumina.

We own shares of Illumina because we believe in the long-term potential of this company. Illumina is the leader in the sequencing market, and its best days are still to come. And with recent chatter that Roche has made another bid for the company, M&A speculation around this company is likely to heat up. But investors don't need us to tell them that. They can simply listen to Illumina's CEO.