With 2009 looking like a banner year for pharmaceutical megamergers, the best case study may well turn out to be Roche Holding AG's attempted takeover of Genentech Inc.

After its initial $89-per-share, $44 billion offer last July, Roche is now going directly to Genentech shareholders with a lower hostile bid that few outside Roche believe will fly.

Spurred by a failure to hammer out a deal with three independent Genentech board members, Roche's tender offer is $86.50 per share, or $42 billion.

It said Jan. 30 it would start the offer within "approximately two weeks," a timeline that CEO Severin Schwan reiterated after releasing year-end results on Feb. 4.

Roche wants to take private the 44% of Genentech it doesn't already own.

The hostile bid comes at a singular moment for the pharmaceutical industry. Facing revenue drops over the next few years, Big Pharma is recession shopping, using billions of dollars in hoarded cash to grab new products and drug pipelines, even as it lays off tens of thousands of employees.

Pfizer Inc.'s $68 billion play for Wyeth, which if completed would create a behemoth with an estimated $70 billion in annual sales and provide Pfizer significant biotech and vaccine capabilities, is the most dramatic example. But others, spurred on by Pfizer and a loosening corporate bond market, could follow suit and target large rivals.

Whatever activity unfolds, nothing will likely top the complexity of Roche's bid, which one Genentech investor called "one hell of a chess match."

In recent deal history, Roche's switch from negotiated merger to a discounted tender offer is "unprecedented," wrote former Lehman Brothers Holdings Inc. analyst Evren Ergin, now with Barclays Capital. In a risk-arbitrage report, Ergin went through a database of 129 minority buyouts since 1989 and discovered not a single successful price reduction. But Ergin says that with the economic crisis, Roche's price cut is "not ... unrealistic" and could be a "reasonable starting point for a higher offer."

Further complicating the matter is the unique contract between the two companies, called the Affiliation Agreement, which sets out the legal terms of their relationship.

In a typical tender offer under Delaware law, where Genentech is incorporated, a buyer that reaches 90% total ownership can brush aside the holdouts with a "squeeze-out," or short-form merger. But the agreement seems to require the final tranche to submit to a negotiated settlement, exactly what has dragged on for months without resolution. If negotiations don't work, the Genentech negotiating committee can seek a binding opinion on value from two investment banks.

This twist could make the price for the final tranche 10% higher than the tender offer, which in turn could compel shareholders to wait for a late bump. "If so many hold out, [they] could sink the tender," says Deutsche Bank AG biotech analyst Mark Schoenebaum. Roche must get at least 50% of the minority-held shares.

More grist for the holdout mill is the looming April release of key data from Genentech's top-selling cancer drug, Avastin. A federally funded study is testing Avastin as a treatment for adjuvant colon cancer, and good results could lead to approval in a much wider patient population. Analysts peg the revenue boost anywhere from $1 billion to $5 billion a year.

Of course, negative or inconclusive data could sink the stock, especially with such high expectations, but so far, clinical trial signals have been positive.

The same investment bank option holds true on a broader level: If negotiations or a tender offer don't work, Genentech's committee could ask the banks to present a fair value. It's unclear whether Roche has any say in the bank option or whether the Genentech committee must go the bank route. The firms have been reluctant to clarify beyond their public statements.

Roche has already begun to reorganize its U.S. operations, which seems to indicate seriousness about the end game: a U.S. realignment, a grab for a full share of Genentech's revenue and a consolidation of functions, such as sales, marketing and clinical development that Roche insists will make the combination quickly accretive.

It has shut down a facility near Genentech's South San Francisco, Calif., campus and diminished the profile of its U.S. headquarters in New Jersey. Roche, of Basel, Switzerland, says Genentech would be its new U.S. center, and it has tried to reassure Genentech employees that the firm's research-driven culture would remain intact.

"The signals so far are more reassuring for Genentech employees than for Roche employees," says Aleksandar Ruzicic, a pharma management consultant in Zurich. "And don't forget a secure job in a global multinational company with a long track record is also valuable."

In August, Genentech began a $370 million employee retention plan. The recession has since hammered biotechs, making soft landings less likely for Genentechers looking to jump.

The Swiss firm also hopes for similar leverage with Genentech shareholders. "Especially in the current market environment, the offer provides an opportunity for all public shareholders to achieve liquidity and to receive a fair price for all their shares," chairman Fritz Humer said in a statement Jan. 30.

"If the offer from Roche went away, the stock price would go tumbling," says Piper Jaffray & Co. managing director Michael Brinkman. Investors might not settle for the current $86.50, according to Brinkman, but "the game doesn't end after the first round."

Roche CEO Schwan said in early February that as soon as the pharma opens the tender offer, it would sell corporate bonds to "serve as a base for further talks on financing the deal." He also said Roche would discuss more details once the tender offer was publicly released.

Using as a comparison Pfizer's debt financing in its $68 billion bid for Wyeth, Deutsche Bank analyst Navin Jacob estimated Feb. 3 that Roche could pay interest rates between 6% and 8%. Pfizer is initially paying 7% to 9% on a one-year, $22.5 billion bridge loan from five banks, though Jacob thinks Pfizer will end up in the 6% to 7% range.

Roche says it will seek a mix of corporate bonds, traditional debt, cash and commercial paper to finance the deal, with bonds likely the first on the list. Roche reported free cash flow of Sfr12.4 billion ($10.8 billion) in net cash at the end of 2008.