Big deal: IP Group makes bid for Touchstone Innovations

It appears that giving UK-based commercialisation firm the GUV Award 2017 for Investment Unit of the Year was even more justified than initially anticipated, following the firm’s shock announcement on the day of the awards ceremony that it had approached its peer Touchstone Innovations with an acquisition offer that valued the latter at roughly £500m ($650m).

While IP Group’s ambition is undoubtedly admirable, Touchstone’s board, perhaps unsurprisingly, rejected the offer – but, on the behest of the majority of its shareholders, engaged with IP Group nonetheless.

David Newlands, chairman of Touchstone Innovations, sent a letter to shareholders in which he explained why the board was not keen on the offer.

He said: “We strongly believe that the opportunities available to Touchstone shareholders are highly compelling in the stand-alone vehicle, and that dilution of your position on the terms of the possible offer would not be in your best interests.

“Second, IP Group’s possible offer was silent as to proposals to retain and build on the best of both companies.”

In fact, Newlands showed himself more than a bit suspicious, adding: “Their announcement on May 23 states that the combination would create a combined business with substantial capabilities that would be greater than the sum of the two parts.

“However, these are people-based businesses, not just assets, and in the absence of a plan to retain and build on the best of both companies, the board believes there is a significant risk of value erosion on both sides.”

Newlands is understandably proud of the achievements of Touchstone Innovations over the past 10 years. He said: “Touchstone has been able to attract talented employees into its venture investment team, based around the clarity and focus of its positioning.

“The members of this team are in turn creating a high-quality network of partners, co-investors and entrepreneurs from which Touchstone and its portfolio companies derive significant benefit.It is the collective skills, knowledge and experience that resides in these people that we believe is crucial to future success.”

Perhaps the highly conservative figure offered by IP Group did not help to sell the deal to Touchstone’s board. At £500m, the price is roughly equal to Touchstone’s market cap – £489.4m at the time of writing – but the firm’s agreements with Imperial College London, from which it was spun out and for which it still acts as a tech transfer office through the Imperial Innovations unit, and University College London are not accounted for in that valuation.

IP Group is no stranger to buying its way into a university pipeline, of course. In early 2014, it acquired Fusion IP – which had commercialisation agreements in place with Sheffield, Nottingham, Cardiff and Swansea universities – and in December last year it bought Parkwalk Advisors, which manages funds for the tech transfer offices of Cambridge, Oxford and Bristol universities.

And IP Group has done well out of those acquisitions, though much of its valuation is dominated by a 20% stake in Oxford Nanopore, an Oxford University spinout that manufactures a portable DNA and RNA sequencer and has raised a total of £351m, including £100m in an IP Group-backed funding round in December.

The keenness of some of Touchstone’s investors for a merger can arguably be explained by the simple reality that neither IP Group nor Touchstone have scored huge returns yet and Oxford Nanopore seems in no rush to list on a stock exchange or seek an acquisition.

Meanwhile Touchstone suffered a hit when a late-stage clinical trial for a cat allergy treatment developed by its portfolio company Circassia Pharmaceuticals showed the drug was no more effective than a placebo. Circassia’s shares crashed by more than two-thirds as a result in June last year.

Russ Cummings, chief executive of Touchstone Innovations, remained optimistic last year and told GUV: “Many of our portfolio companies made significant technical, clinical and commercial progress during the year, and while Circassia suffered a setback with one of its late-stage clinical trials, this is a feature of biotech investing and our strategy of supporting UK science and ambition to create world-class businesses remains undiminished. We raised a further £100m to strengthen our balance sheet, which will enable us to put more money to work in our exciting portfolio.”

What are the odds that the merger of IP Group and Touchstone Innovations will go ahead? With Touchstone shareholders representing, in aggregate, 51.8% of issued share capital, and backers including Woodford Investment Management and Invesco Asset Management – both of which are also IP Group shareholders – the chances of a hostile takeover are fairly high.

If the merger goes ahead, Touchstone shareholders would own 33% of the combined entity. Rules of the London Stock Exchange mean IP Group has until 5pm on June 20 to make a formal offer or announce that it has decided to not go ahead.

But while IP Group has obtained the backing of a majority of shareholders, Newlands and the board are not the only ones to voice their concern.

David Kneale, head of UK equities at Mirabaud, which holds a 1.3% stake in Touchstone, told the Telegraph: “Touchstone has a portfolio of diversified, well managed, well developed and rapidly progressing businesses of tremendous potential. The valuation basis on which these investments are held appears extraordinarily conservative.

“There are several which we believe to be worth many multiples of their current carrying values, backed up by recent commercial contracts potentially worth hundreds of millions of pounds. We were very pleased to see the board reject the approach and commit to protecting the interests of all Touchstone stakeholders and shareholders.”

An informal poll at the GUV:Fusion conference in London on the day of IP Group’s announcement meanwhile revealed that the vast majority of delegates would, if they were Touchstone shareholders, reject the bid with the argument that the UK ecosystem would not benefit from consolidation.

One of the arguments was that a national firm that buys up everyone else would defeat the very point of setting up university venturing funds that are close to an institution, its local ecosystem and its faculty. One panellist called the idea of a large investment firm “not healthy for the UK”.

IP Group has generally been a successful player in the UK’s tech transfer ecosystem – it was instrumental in making the country’s universities some of the global leaders in commercialisation. It was partially in recognition of that importance that the firm was awarded a GUV award last month.

Yet a takeover – specifically a hostile takeover – of Touchstone Innovations may not be the best way forward. As Newlands outlined in his letter to shareholders, the firm is not just a collection of assets but an organisation made up of dedicated people, and nothing would stop those talented fund managers from walking away if they are unhappy with a takeover the board did not back.

A walkout would decimate Touchstone’s value – creating a losing situation for both firms and for many spinouts.