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Thursday, August 17, 2006

Becton Dickinson’s Deluxe Acquisition of TriPath Imaging (BDX, TPTH)

submitted by Saul Sterman, CEO

Until April 2006 Roche Holdings, the largest and most influential direct shareholder was selling shares on a regular basis. The last reported sale was on 4/18/06 @ $6.99.

There are two points of interest. 1) The amount of shares Roche was selling was significant enough. They were cashing out of the stock. The sales register reads like a notice to management ‘get your act together or else I’m out of here’. 2) After twenty (yes – 20) unplanned sales of stock over a 46 day period, the sales suddenly halted no matter what price the stock traded at!

I first noticed this phenomenon on 5/8/06 and went long on TPTH as of 5/11/06. Three months later, 8/8/06 I doubled my position. At the time I had no idea what the real story was but I smelled a buyout.

Following the stock from May I noticed that insiders like Sullivan were not selling at $8 or when the stock dropped to $7 or $6 or even below. When the stock fell below $6 and still there were no transaction by insiders the game was afoot. The insiders were not allowed to buy (or sell) once they knew that BDX would be making an offer. Doubling my position was the only logical conclusion and as it turned out it was just in time.

Here’s the Whole Tale

Not often does one get to eat the cake and still have it whole at the same time. This goes for both BDX and TPTH. The two companies have a close working relationship for over five years.

TriPath finally came to realize that what they excelled at was developing new technology. Where they lacked proficiency was primarily in handling bureaucracy and marketing. Though one may argue that TriPath was a dark horse at low cost manufacturing, this could have been easily rectified through outsourcing. The never ending fumbles with the FDA, the constant revamping of its marketing efforts combined with the none existent PR department nor a dedicated IR officer, is just a few examples as to why this company could not continue on its own. In April 2006 the ax dropped.

Pressured by Roche Holdings, Sullivan and others finally agreed to sell the company. This was done with the utmost discretion. The Street hadn’t a clue as to what was going on.

The Plot Thickens

James Petrilla joined TriPath in January 2006. Petrilla was the former CEO of Aldagen Inc. and was promoted to equivalent CEO status (for CCS business) in July 2006. BD Ventures funds the Aldagen start up. Guess who owns BD Ventures!
BD Ventures, L.L.C., a wholly-owned subsidiary of Becton Dickinson and Company (BD), was founded in 1999. BD Ventures is a strategic investor, and hence seeks to invest in venture-stage companies that fit well with one of BD’s business segments: BD Medical, BD Diagnostics, and BD Biosciences. BD Ventures has led rounds or co-invested alongside private and corporate venture capital funds.

Talking about having a man on the inside, had I seen the connection before now I would have increased my position tenfold. BDX knows exactly what it is buying. I doubt if a genuine attempt was made to solicit offers from others though I have no information on the topic.

Out of the 38.4 million shares outstanding approximately 17.7 million shares are held by institutions and mutual funds. 8 million shares are held by insiders and the remaining 12.7 million shares by the general public. Approximately 9 million shares have traded hands since the announced offer.

BDX announced that it would be closing the deal in the first quarter of 2007. In theory this is ample time for others like ABT or JNJ to put forward an offer. $400 million is small change for the likes of ABT. ABT has stated that it is looking for acquisitions in medical devices and health care equipment sectors. If TPTH is worth at least $9.25 to BDX, then just imagine what ABT could do with TriPath technology not to mention the talent and stem cell bonus that’s included in the package. In my opinion in comparison with BDX, ABT has better management.

On the surface the four month wait period squashes any rigged sale conspiracy. After the shares dropped from $8 to $5.25, investors should be delighted to receive $9.25 in cash. After all can you prove that the company did not make an earnest attempt to stem the slide? Having successfully masterminded this deluxe acquisition, should BDX scent another offer in the making they will most certainly attempt to close the deal sooner.

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