The $7 Billion Wall Street Gamble

Photo by Kevin Dietsch/Getty Images
CEO of Illumina Francis deSouza at Sun Valley in 2021
William D. Cohan
September 15, 2021

Wall Street M&A bankers are on track for their biggest year of all time. It’s only September and yet 2021 is on pace to see the highest dollar volume ever, with nearly $4 trillion worth of announced deals already this year, putting within reach the all-time record of $4.3 trillion, which was achieved in 2007, right before the financial crisis. 

Most of these deals will be reviewed, and approved, by one regulator or another across the globe: the European Commission (E.C.), in Brussels; the Federal Trade Commission (F.T.C.); or the Justice Department, in Washington, D.C. There are always plenty of disputes when it comes to getting mergers and acquisitions approved, most of which get resolved diplomatically with a divestiture here and there, or by what used to be called “behavioral remedies”—agreements under which the combined companies can operate to satisfy the concerns of the regulators. 

For instance, back in 2014, G.E. struck a deal to acquire Alstom’s power and transmission businesses for $13.5 billion. But the European Commission’s regulatory review lingered for 18 months, and ended up forcing Jeff Immelt, G.E.’s C.E.O., to restructure parts of the deal and to sell a servicing business in Florida that G.E. otherwise wanted to keep, in order to help get the deal approved. Immelt ultimately decided to close the deal, after getting the E.C.’s approval and making the changes that Brussels wanted. Meanwhile, some 13 years earlier, Immelt’s predecessor, Jack Welch, walked away from G.E.’s $45 billion deal to acquire rival Honeywell after the E.C. tried to force G.E. to divest more assets than Welch could stomach. “Are you shitting me?” Welch memorably told the European regulators. “You’re asking me to buy an 18-hole golf course that’s only got 15 holes!” He abandoned the deal. (Both decisions—Immelt’s to buy Alstom and Welch’s to quit the Honeywell acquisition—were arguably mistakes, although that’s a subject for another day.)

Now, another company, Illumina, Inc., based in San Diego, is forging an exceedingly rare legal path to dealing with what it perceives as obstreperous regulators in Brussels and in Washington. The company decided to close a pending deal, originally valued at more than $7 billion, before getting the necessary regulatory approvals. Illumina will face the consequences of that decision, if there are any, down the road. It’s the M&A equivalent of poking a formidable adversary in the eye with a sharp stick. In all my years in both finance and business journalism, I’ve never seen anything quite like it. 

Francis deSouza, Illumina’s C.E.O. (and an independent director on the board of the Walt Disney Company), couched his decision in moralistic terms. I had never spoken with deSouza before but he’s quite accomplished. Born in Addis Ababa, of an Indian father and an Ethiopian-Greek mother, he went to M.I.T. and then set out for Silicon Valley, where he was a successful entrepreneur. He built businesses later bought by Microsoft and Symantec. He’s been C.E.O. of Illumina for five years and seems extremely rational. Closing the deal without the regulatory approvals, he told me, is something he believed he had to do to benefit humanity. That’s an interesting argument.

A little background: A year ago, Illumina, which bills itself as a global leader in D.N.A. sequencing with a market value of nearly $70 billion, agreed to buy Grail for, at the time, approximately $8 billion in cash and stock. Grail is a private company that tests blood in order to provide early detection for a variety of 50 cancers. In some ways, it was a reunion. Illumina actually created Grail back in 2013 when an Illumina scientist, Dr. Meredith Halks Miller, was processing blood samples of pregnant mothers in order to test the health of the baby as part of a noninvasive, neonatal test. The scientist discovered that the babies were fine but several of the mothers had “abnormal” D.N.A. 

Those mothers, it turned out, had cancers they did not know about. “We knew this was a pretty profound discovery,” deSouza told me. Illumina nurtured Grail on its own for a couple of years and then, in 2016, decided to spin it out into a separate private company in order to facilitate the raising of nearly $2 billion in capital needed to conduct extensive clinical studies. The outside investors in Grail included funds controlled by Bill Gates and Jeff Bezos. Over time, Illumina’s stake in Grail was reduced to just under 15 percent.

Once Illumina announced the Grail deal, in September 2020, it sought the approval of U.S. regulators. An F.T.C. review was expected. But since the F.T.C. has never successfully blocked a “vertical merger”—a merger between two companies in different businesses—in court, the Illumina executives and their outside professionals (Goldman Sachs, on the M&A advisory side, and Cravath Swaine & Moore, on the legal side) appeared not particularly worried about the F.T.C. review. 

But it’s complicated. The F.T.C. and Illumina are now in the midst of an administrative trial about the deal. The F.T.C. has argued in its complaint that Illumina is a monopolist in next-generation sequencing equipment and supplies and can’t own a “downstream customer” such as Grail. The F.T.C. rarely loses such administrative trials. But when that decision is appealed to the federal courts —as it would be by Illumina if the F.T.C. prevails—the courts have rarely blocked a vertical merger, which would give Illumina the ultimate victory, years from now, perhaps after an appeal to the Supreme Court. 

Soon after the merger was announced, regulators in the U.K. wondered if they should review the deal, but “after some back and forth,” deSouza explained, the U.K. decided against reviewing it. Grail does no business in any of the 27 countries that make up the European Union, he said, and has no plans to enter those markets for the next five to 10 years. “It didn’t meet the regulatory threshold for any filing with the [European Commission],” deSouza explained.

In April, however, the E.C. told Illumina that it was going to review the Grail deal after all, invoking “Article 22,” which allows countries without an antitrust authority to reach out to the E.C. and ask it to review a pending deal. It turned out that France, Greece, and Iceland, among a few other countries, wanted the E.C. to review the Illumina/Grail transaction. “It’s turning out to be more frustrating than anyone expected,” deSouza told me.

Believing that the E.C. improperly invoked Article 22 and that Brussels had no jurisdiction over the merger—given that Grail does no business in any E.U. country—Illumina sued the commission in the European Court, in Luxembourg. That legal process has bogged down. Illumina is also in the middle of the separate E.C. review, at Phase II. Neither the Luxembourg court case nor the E.C. review process were expected to be completed by the deal’s outside contractual “drop dead” date of  December 20, 2021. Rather than lose the opportunity to acquire Grail because of the ongoing regulatory and legal processes, deSouza decided to close the transaction in August and to keep Grail as a separate, wholly owned subsidiary of Illumina without integrating it into Illumina.  

DeSouza believed the E.U. was slow-rolling the process, and he didn’t want to lose out on the transaction. “Given the stakes here and given the lives that are at stake, we felt a moral obligation to at least have the deal reviewed,” deSouza said. “We didn’t feel that this was the kind of deal that should be decided by an expiration date. So that’s why we did what we did. Now to respect the process, we are keeping Grail separate. So we’re not doing any of the integration until we get approval from the European Commission.”

Margrethe Vestager, the E.C. executive vice-president in charge of competition policy, was none too pleased with deSouza’s decision. “We deeply regret Illumina’s decision to complete its acquisition of Grail, while our investigation into the transaction is still ongoing,” she wrote in an August 20 statement posted to the E.C. website. “Companies have to respect our competition rules and procedures. Under our ex-ante merger control regime companies must wait for our approval before a transaction can go ahead. This obligation, that we call standstill obligation, is at the heart of our merger control system and we take its possible breaches very seriously. This is why we have decided to immediately start an investigation to assess whether Illumina’s decision constitutes a breach of this important obligation.”

Working through the legal process in Luxembourg and the regulatory process in Brussels will take time. With appeals, assuming Illumina loses everywhere, deSouza figures it will be 2025 before the final denouement will be known. If Illumina exhausts its appeals, deSouza said, then of course Illumina would divest Grail for the second time. Although by 2025, depending on market conditions, Illumina could get more for Grail than the $8 billion it just paid the company’s shareholders. “This health care technology has the potential to be transformational, not just for people’s health, but the economics of health care,” he said. 

He shared a testimonial from one patient of a clinical oncologist who had taken the Grail test, which costs $950 and is not reimbursed by most insurance plans. The patient, a man in his 50s with no symptoms of any kind, had just had a colonoscopy and decided to also take the Grail test at the recommendation of a friend. The test revealed that the man had Stage II pancreatic cancer. The oncologist told deSouza she had never seen a case of Stage II pancreatic cancer before. “You don’t see Stage II,” deSouza explained. “It has no symptoms until Stage IV, and at Stage IV, it’s a death sentence and you have six months left to live.” The patient had surgery and now appears to be cancer-free, he told me. “That’s the power of this [test],” he said. 

DeSouza also has taken the Grail test. “It was six days between doing the blood test and getting the call from my doctor,” he said. “Obviously, that’s a stressful period, but then I personally am going to do the test every year because I feel that that gives me a higher chance of it getting caught early, and gives me the best chance of beating it if I ever get it.” He’s also making a free test available as a perk for Illumina employees over 50 years old who are in high-risk categories. “It’s one of the benefits that has just been incredibly well-received by our employee base, and uptake has been good,” he said.

DeSouza said he knows that closing the Grail deal without the regulatory approvals was a risk, but it was one he decided to take because he wants to accelerate the roll-out of the cancer tests and to accelerate the process by which the test will one day be reimbursable. “This is one of those rare cases where you get better outcomes and lower costs,” he said. “Our hope is that this deal does get a review, a full review, and that we do get approvals. Then we just move as fast as we can to make this test available around the world, and make it reimbursed and accessible around the world.”

He continued: “The potential of this to save lives is so enormous that we felt that we have a moral obligation to make sure we did everything we could to make sure this deal got a full and fair review. Ultimately, of course, we will abide by whatever the outcome is, but we didn’t want to feel like there was something we could have done that we didn’t do. We have a moral obligation, we feel, to at least have this deal heard.”     

Time will tell whether the courts and the regulators end up agreeing with deSouza’s unorthodox move. His logic is impeccable: A well-capitalized company such as Illumina can get the Grail test into the marketplace faster and use it to, theoretically, save the lives of hundreds of thousands of people. But regulators tend to prefer being asked for permission rather than being begged for forgiveness. And that’s why most C.E.O.s don’t do what deSouza did. 

But they will if he gets a favorable outcome. “I’ve heard from lots of C.E.O.s, board members of companies, people who sit on more than one board, for sure general counsels and other lawyers in the antitrust bar,” said one lawyer involved in the matter. “They’re on the sidelines cheering us on.”