King reveals nixed bid for Alpharma; Genentech will pay to keep staff; Sovereign gyrates on GSE fears

By Paul Deckelman

New York, Aug, 22 - The latest merger-and-acquisition move in the pharmaceuticals and biotechnology sector provided the formula for some healthy price action on Friday, as Alpharma Inc.'s stock zoomed nearly 50% after would-be suitor King Pharmaceuticals Inc. revealed that it had made a $33 per-share offer to buy the Bridgewater, N.J.-based company, only to have its advances summarily rejected. King said that it was prepared to go to Plan B and take its offer directly to Alpharma's shareholders - but they pushed the stock above that $33 mark, which analysts took as a sigh that they expect King to sugar-coat its offer by raising the price.

Elsewhere in that sector, Genentech Inc. - which has already spurned Roche Holding AG's $89 per-share acquisition offer, but which left the door open for a higher offer, outlined an expansive - and expensive - employee-retention plan aimed at keeping its most valuable asset - its cadre of talented personnel - in the event that the company is acquired by Roche.

In the financial arena, Lehman Brothers Holdings Inc.'s shares were higher in busy dealings, on news reports that Korea Development Bank is considering the embattled Wall Street firm for a possible acquisition.

On the other hand, Sovereign Bancorp Inc.'s shares have been getting clobbered all week on investor fears that the Philadelphia-based regional banker may be hurt by its Fannie Mae and Freddie Mac preferred stock positions, However, it pulled out of an early spin Friday to finish the week on an upbeat note.

Spurred on by investor enthusiasm about a possible rescue for the troubled Lehman, a $6.59 per barrel fall in world crude oil prices that completely erased Thursday's $5 surge, and Federal Reserve chairman Ben Bernanke's prediction that inflationary pressures are likely to moderate, Wall Street generally staged its own end-of-week rebound. The Dow Jones Industrial Average jumped 197.85 points, or 1.73%, to 11,628.06, closing near its session-high. The Standard & Poor's 500 index rose 14.48 points, or 1.13%, to 1,292.20, while the Nasdaq composite index rose 34.33 points, or 1.44%, to 2,414.71.

But Friday's surge still left stocks with losses for the week, with the Dow down 0.27%, the S&P 500 off 0.46% and the Nasdaq down 1.54%.

Alpharma defies the King

One of the day's biggest movers, on a percentage basis - Number-Two overall and tops on the New York Stock Exchange - was Alpharma, as news of King Pharmaceuticals bid proved to be welcome medicine for investors, who pushed the stock even above the price that King had unsuccessfully offered. The shares jumped as much as 46.7% on the day at one point before coming down - but only slightly - slightly from their peak level of $35.29. Volume of 21.4 million shares was nearly 27 times the usual daily turnover.

The shares soared on King's early-morning announcement that it had delivered a $33 per share all-cash offer to Alpharma's board of directors at the beginning of August. It said that the price represents a 37% premium over the closing price of Alpharma's common stock on Thursday, the last trading day prior to the public disclosure of its buyout proposal, and a 49% premium over the closing price of Alpharma's shares on Aug. 4, the date of King's initial written offer to Alpharma. The proposed price implies a total equity value of approximately $1.4 billion for 100% of the fully diluted share capital and an enterprise value of approximately $1.2 billion.

Alpharma's reply was not long in coming. It said Friday that the unsolicited, non-binding proposal from King was identical in all material respects to two prior proposals made privately by King to the company, and it declared that the offer was not in the best interest of its shareholders.

Responding to this response, Bristol, Tenn.-based King said that "we continue to prefer to work together with you and your board to complete a negotiated transaction, and we are prepared to commit all necessary resources to do so." However, King's chairman, president and chief executive officer, Brian A. Markison, cautioned his counterpart at Alpharma, Dean J. Mitchell, that "if we are unable to negotiate a transaction, we are prepared to take this offer directly to your stockholders."

However, the shareholders seem to have already indicated that they want - and fully expect - King to raise its bid.

"I think it's going to have to go up," a market source said Friday, predicting that the offer could "easily" be raised to $37 per share, or perhaps even $40.

He believes that King - which, like Alpharma, specializes in pain medications and wishes to build on the strength that the combined company would have in that particular niche - wants this combination badly enough that it will likely accede to Alpharma's wishes and sweeten the offer.

"No, I don't" believe that King would deliver a take-it-or-leave-it ultimatum to Alpharma. "I think they still want to do this. They started at the beginning of August, and they've been holding their breath. They're still pretty interested" in the combination, the source continued.

However, he said that there might be limits to King's patience, should it decide to lay hardball and if neither side budges.

"They're interested in it up to a point in time. I'd give them another couple of weeks. But if they don't have anything definitive in a month or so, they probably won't do it."

He said that one factor which may cause them to pull out if a deal is not cinched by then is King's desire to have deal done - including all of the necessary regulatory approvals - "before the administration changes.

"If they don't have an agreement by September or October, "if might be a little tough for them to get HSR [i.e., approval from the Federal Trade Commission and Justice Department anti-trust regulators as mandated by the Hart-Scott-Rodino Act]."

The source said that it was his impression that although public disclosure of the bid puts Alpharma into play, at least in theory, another suitor was not likely to step forward and spirit the company away from under King Pharma's corporate nose. For one thing, he said, "it's quite a juicy premium" over Alpharma's previous stock price that King is offering.

He also said that so far, no potential rival bid has emerged.

"If there were other bidders, I think that Alpharma would have gone to King and said 'hey, we got other offers from other people.' The fact there hasn't been any other bidders says something. The fact that they flat-out rejected it probably means they have no other offers, right now."

However, that could change, according to RBC Capital Markets analyst Ken Drbovich, who said that the King offer "puts the company in play," since there is now an expectation by investors that other players could "step forward with a more attractive offer."

Alpharma (NYSE:ALO) ended up by $10.47, or 43.55%, at $34.51. King Pharmaceuticals (NYSE:KG) gained 95 cents, or 8.45%, to end at $12.19.

Genentech generates personnel plan

King's attempt to grab up Alpharma is the third such recent gambit by a larger pharmaceutical company to push an unwilling smaller player into a merger. At the end of July, Bristol-Myers Squibb Co. offered $4.5 billion to buy its cancer drug partner, ImClone Systems Inc., with ImClone rejecting the unsolicited offer as inadequate. And the same thing happened about a month ago, when European drug giant Roche offered $ 43.7 billion to buyout the remaining 44%of its cancer drug partner, South San Francisco, Calif.-based Genentech.

That latter company also rejected the unasked-for advance, declaring the Swiss firm's $89 per share offer to be inadequate. Wall Street agreed, pushing the shares up to around the $100 mark, far above the Roche offer.

At the same time that it spurned the bid, it said that it would offer incentives to keep its 10,700 employees on board amid the uncertainty that the possibility of a buyout engendered.

Genentech on Friday revealed the details of the employee-retention plan, which could cost as much as $371 million. The plan, which replaces the company's 2008 stock option program, would cut earnings by 22 cents a share from 2008 to 2010 if fully paid.

Key executives could reap millions of dollars of retention bonuses, including CEO Arthur Levinson, who would be in line for $8.74 million, and Susan Desmond-Hellmann, the president of product development, who would be eligible for $4.59 million.

Genentech, while rejecting Roche's initial offer, said it would be open to further talks on raising the bid, and some analysts believe that this is what will probably happen.

Sanford C. Bernstein analyst Geoffrey Porges said in a research note that "acquisition seems inevitable," believing that the two companies will continue dickering before finally settling on a figure somewhere between $105 and $110 per share.

Another analyst, Michael King of Rodman & Renshaw, has said that an offer of $125 to $136 a share would more fairly value the company.

In Friday's action, Genentech (NYSE:DNA) gained 63 cents, or 0.65%, to end at $98.06.

Lehman leaps on Korean rescue possibility

In the financial sector, Lehman Brothers - whose shares have been battered by its loss of more than $8 billion last year and this year in the wake of the subprime mortgage-induced credit crunch, which has also forced Lehman to raise billions of dollars of capital to keep operating - pushed upward after Korea Development Bank said it is considering a possible investment in Lehman.

"KDB is considering all kinds of options, including Lehman Brothers," a spokesman for the Seoul-based bank said on Thursday. Lehman declined comment on the possibility.

But its hard-pressed shareholders - whose shares have lost nearly three-quarters of their value in the last year alone - were cheered enough to push the shares up. Volume of 113 million shares was more than twice the usual turnover. Lehman (NYSE:LEH) rose 69 cents, or 5.03%, to $14.41.

Sovereign rebounds from GSE-induced funk

Another financial issue, Sovereign Bank, took its lumps over four consecutive sessions, from Monday through Thursday, amid investor angst over the possibility that its roughly $620 million position in preferred shares of Fannie Mae and Freddie Mac could become as worthless as Monopoly money if the federal government has to step in and bail out the struggling government-sponsored enterprise companies. Expectations are that Freddie and Fannie common shareholders would be completely wiped out in that case.

And no less an expert than billionaire market guru Warren Buffett further unsettled investors in institutions holding Fannie or Freddie preferreds when he told a CNBC interviewer Friday that while investors in GSE senior debt or insured mortgages have no cause for alarm in the event of a government bailout, "the equity and preferred stock is another question."

As of June 30, Sovereign held $173.8 million in Fannie Mae preferred and $448.8 million in Freddie Mac preferred.

But while that caused its shares to retreat over the first 4 sessions of the week, and to drop a further 6.2% in the early going Friday, the shares had turned around later in the session, perhaps helped by the overall rebound in financial issues encouraged by the possibility that KDP may invest in Lehman.

A market source, viewing those gyrations, suggested that "it makes it all the more likely they will sell to STD" - Spain's Santander Bank, which already owns about one-quarter of Sovereign's shares, but which so far has made no move to scoop up the rest.

Sovereign (NYSE:SOV) ended up 22 cents, or $2.66, at $8.49.

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