All things considered, 2009, as far as M&A goes, has begun better than it might have.

Rohm and Haas Co. shareholders, unhappy over Dow Chemical Co.'s denial that it has obligations to complete the acquisition of Rohm, might disagree. And the equity and credit markets are not yet stable enough to deliver an expected wave of financial services deals.

But the pharmaceuticals industry is delivering. In the lead is Pfizer Inc.'s $68 billion acquisition of Wyeth. When equity capital is squeezed and Big Pharma needs to feed its top line, biopharma deals are likely to follow.

Whether that means more Big Pharma mergers remains to be seen. But the market is looking in that direction. Rumors last week sent Bristol-Myers Squibb Co. shares up on expectation that the company might be taken out by Sanofi-Aventis SA. The most interesting current arb situation is the now-hostile bid by Roche Holding AG for its longtime biotechnology partner Genentech Inc.

Genentech Inc. |DNA
Roche Holding AG |RO.SW

Deal value $40.2 billion

Spread 02/02/09 $4.40, or 5.4%

Roche Holding shook up its attempted buy-in of Genentech with a threat to make a hostile tender offer months before key drug data will determine the biotech's value. The bid should come this week, along with a response from Genentech's board of directors.

Roche owns 55.8% of Genentech and is launching the tender offer for the remaining shares for $86.50, or about $40 billion. The offer is a 2.8% reduction from a bid by Roche to the Genentech board last July at $89 per share. A Genentech special committee rejected that offer in August. The special committee said it would make a recommendation after the commencement of the current offer, but effectively it urged against tendering by reiterating that $89, the higher price, was still too low.

The validity of the tender offer is itself somewhat uncertain. The affiliation agreement between Genentech and Roche specifies in a section titled "Business Combinations with Roche" that the Swiss pharma agrees, as a condition of closing any merger with Genentech or purchase of its assets, to require approval of the majority of the minority shareholders at a meeting.

Roche said it now intends to make the tender offer with a nonwaivable condition that it receive a majority of the minority shares in the offer. Some arbs think that is enough to meet a fairness standard under Delaware law and also that the affiliation agreement requires a meeting only for a "merger" and does not specifically deny Roche the right to make a tender offer or to purchase shares.

Will the Genentech board find a disagreement over whether a tender offer breaches the affiliation agreement? In a tender, Roche might ask Genentech shareholders for consents, which could undercut the shareholder vote issue. Still, a shareholder vote is considered a higher standard in Delaware than a tender offer.

More importantly, Genentech said it expects data on its Avastin adjuvant colon cancer trial as early as mid-April. That data could affect Genentech's share price. Analysts said a $95 offer attributes modest value to Avastin's potential.

The affiliation agreement provides that if a shareholder meeting is held for a merger or purchase of all of Genentech's assets by Roche and the vote fails, then a valuation process is initiated whereby the average of two investment bank valuations determines the price. It's possible Roche's strategy is to push the deal into that valuation process.

Some arbs think that since Roche is not holding a shareholder meeting, the valuation process could not be initiated if the tender offer failed to win a majority of the minority shares. And it would seem the Genentech special committee would have to participate in that process.

With the lower offer, Roche is flexing its muscles and trying to spook institutional shareholders who think the price should be more than $100, an arb says.