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Bausch & Lomb [ticker symbol="BOL" primary="true" />) was in focus again July 6 after it received a competing bid from a rival eye-care company that beats a prior all-cash offer from Warburg Pincus by $10 a share.



After the market close on July 5, Advanced Medical Optics [ticker symbol="EYE" primary="true" />) offered to buy the troubled company for $75 a share in a 60% cash/40% stock deal, subject to termination of a May 16 merger agreement with private equity firm Warburg Pincus. AMO's bid came just hours before the midnight expiration of a 50-day period that Bausch & Lomb was allowed under its agreement with Warburg Pincus to shop for more attractive offers.



The competing offers must seem like a dream for the Rochester [N.Y.] company after being put through the wringer over the past 18 months. Bausch & Lomb suspended financial filings in late 2005 after discovering accounting irregularities and weak controls of financial reporting at its Brazilian and Korean subsidiaries and was required to restate financial results for prior reporting periods. In May, 2006, it withdraw its ReNu with MoistureLoc solution from store shelves because of its potential link to eye infections and more permanent damage through corneal staining. The company is also facing nearly 350 lawsuits from customers who used ReNu.



Warburg's proposed price of about $4.50 billion represents a 26% premium to Bausch & Lomb's average stock price before rumors of a deal began in the weeks leading up to May 16. AMO's proposed price translates to a premium of 36%.



Warburg Pincus has five days to provide a higher counter offer and some analysts believe it will be willing to go as high as the low $70 range.



A rival bid from AMO seemed like a long shot in late May, when the company announced a voluntary recall of its Complete MoisturePlus products after U.S. health officials linked them to a rare amoebic infection that can cause blindness. Analysts estimated the recall could reduce AMO's estimated earnings by 25 to 50 cents, making financing another acquisition that much more improbable.



"There's not a lot of visibility on the operating synergies [of a combination of AMO and Bausch] or even on fixing the stand-alone operations of each of company individually," said Mark Mullikan, an equities analyst who covers both firms for Piper Jaffray & Co.



AMO shares were trading 1.5% lower July 6 and Bausch's stock was off 0.1%.



AMO is already highly leveraged, having added debt in April to fund its $808 million purchase of IntraLase Corp., which makes a more precise laser for eye surgery.



AMO told analysts at BMO Capital Markets Corp. that Goldman Sachs has committed to providing the cash portion of the offer price, or $2.54 billion, and said its balance sheet wouldn't be any more laden with debt after buying Bausch than it is currently, according to a BMO research note on July 6. BMO estimated AMO's debt-to-capitalization ratio at 71% for 2007, following the IntraLase acquisition.



AMO also needs to get approval for the acquisition from the majority of its shareholders, who may be wary of the company possibly overreaching financially while still working on the integration of IntraLase and deciding how to compensate for the Complete MoisturePlus recall. That said, Bausch's strong brand recognition would certainly be a plus as the combined company goes up against Alcon Inc. [[ticker symbol="ACL" primary="true" />), which has become the dominant player in the eye-care market since the two recalls.



Besides the greater degree of certainty that a deal with Warburg Pincus can be completed, the opportunity to be taken private offers certain advantages to Bausch & Lomb, most importantly not being subject to the pressure to meet quarterly earnings benchmarks that publicly traded companies face.



"There are some fundamental, operational and strategic issues that, rather than focusing on what Wall Street wants to see quarter to quarter, you can focus on the longer term," Mullikan said. It's a given that Bausch would want to go public again as a stand-alone company sometime in the future, he added.



Bausch has been current with its financial reporting obligations since June 19, when it filed the last of its outstanding quarterly financial reports with the SEC.



The retrospective filings may provide transparency about how the company has fared financially through the travails of the past 18 months, but they don't give investors any certainty about how much market share the company will be able to reclaim or how great its capacity to generate future profits is, Mullikan added.



In a June 22 research note, Goldman Sachs cut its earnings forecast for Bausch for 2008 by 10% and for 2009 by 14.5% on the likelihood that the company would "have to commit more resources to regain market share in contact lenses and lens care solutions."



In weighing the competing bids, Bausch shareholders are likely to discount the 40% stock component in AMO's offer, preferring Warburg's all-cash deal, Mullikan said.



Given his certainty that Warburg will counter with a bid in the low $70 range, the big question is how high the bidding will go, he said.



While there's always more risk when there's an equities component to an offer, there's also opportunity for investors interested in owning Bausch & Lomb over the longer term, said Joe Maguire, senior research analyst at Penn Capital Management Co. Inc., which bought Bausch shares late last year and also has a position in AMO.



Another thing to bear in mind when weighing the offers, Maguire said, is that Warburg is just as likely to lever Bausch & Lomb as AMO, without being as committed as AMO to investing in research and development or capital expenditures.



It's fairly obvious that AMO would bring more knowledge about the eye-care market to a merger than Warburg Pincus. Less than two months ago, AMO even brought Robert Palmisano, who had served as president, chief executive and a director of IntraLase, onto its board. Palmisano has headed Bausch's eye-care business from 1988 to 1997.



With Palmisano on board, AMO "could have some insights into how Bausch may have gone wrong" with inadequate oversight of the Brazilian and Korean units, Maguire said.



Mark Mullikan doesn't own shares of Bausch or AMO and Piper Jaffray doesn't do investment banking with either company. Goldman Sachs owns at least 1% of Bausch & Lomb stock and expects to receive compensation for investment banking from the company within the next three months. BMO doesn't do investment banking with either company.