While an all stock offer is hardly unusual, in this case the structure was chosen in order to protect the tax free nature of Baxalta’s spinoff. That is a sizable hurdle to overcome and Shire is facing a difficult task in trying to sweeten their offer while also keeping a lid on the potential tax risk. One idea suggested by tax experts to inject some cash into the deal and incur favor from BXLT shareholders is to have Baxalta issue debt to fund a special dividend prior to the takeover. Just upping the offer might be another solution, but Shire’s stock price has since come down a bit, so the effective value of the transaction has gone down quite a bit on its own. Shire would have to increase the amount of shares offered just to match its initial price.
Baxalta’s CEO seems willing to fight for a few years to achieve its goals as an independent company, but there is certainly a price at which a deal would make sense. It remains to be seen whether Shire can come up with a compelling offer that is also blessed by tax experts, but it seems they are still trying. The company is willing to be patient and seems disciplined enough to want additional information before considering increasing its offer. The WSJ piece includes a few examples of spinoffs being bought within months of achieving independence and notes that as time goes by, the tax risk continues to lessen. Of course, stricter inversion rules could raise new tax risks for a deal of this type so perhaps waiting might be damaging.
This should be an interesting situation to watch over the next few months.
Disclosure: Author holds no position in any stock mentioned.