Monday, November 22, 2010
Gina Chon and Preeta Das at the WSJ have an article this morning suggesting that Genzyme might be open to a deal with Sanofi if it's given certain back-end protections for its shareholders. The basic problem that has stood in the way of Genzyme doing a deal with Sanofi has been valuation. Genzyme's board has consistently said that Sanofi's bid woefully undervalues Genzymes short and medium term prospects. It looks like that the parties might be reaching back into the old bag of trick for a deal device to bridge the valuation gap. They're calling it a contingent value right -- a right that would pay off for Genzyme shareholders in the event Campath (Genzyme's new drug) outperforms certain targets.
Wait a minute ... that sounds like an earnout. In fact, it is an earnout. The CVR is typically used when buyers are offering stock as consideration and the seller is not convinced that the short or medium term value of the stock is worth what the buyer claims. The CVR gives the selling shareholders the right to come back to the buyer for cash ex post in the event the price of buyer's stock fall belows a target rice.
The earnout on the other hand is a contracting device that helps to bridge the valuation divide from the other end. The buyer is not convinced the seller's asset is worth what the seller claims it is. The earnout lets the seller put her money where her mouth is. If ex post the seller turns out to be worth what the seller says it's worth, then the seller's shareholder get additional compensation. If not, not.
What's unique about the earnout that Genzyme may be talking to Sanofi about is that Genzyme is a publicly traded company. Typically earnouts are only used when the seller is privately-held. Rarely does one see a public company target getting an earnout. In any event, that doesn't change my general view of earnouts: it's best to just say no. Particularly given that the parties to this possible deal are not necessarily on the same page, it would probably be best for them to avoid disputes later down the road to do the hard valuation work now. But, hey, that's just my opinion.
Those of you reading in the US - have a great Thanksgiving. I'll be posting again next week.