Boston Scientific Bid Leaves Guidant With Tough Choice

By Jim McCartney, Pioneer Press, St. Paul, Minn.

Dec. 7–No one should be too surprised if Guidant Corp. turns down Monday’s buyout offer from Boston Scientific — after all, they rebuffed Boston Scientific about a month ago.

On Nov. 1, Guidant received a feeler from Boston Scientific to talk about a “possible business combination,” it was disclosed in a merger document filed Tuesday with securities regulators by Johnson & Johnson. The next day, after consulting its attorneys, Guidant turned Boston Scientific down, citing its “original merger agreement with Johnson & Johnson.”

“I’m surprised by that,” said Thomas Gunderson, a securities analyst with Piper Jaffray Cos. “It lowers my opinion of the overall intelligence of (Johnson & Johnson’s) lower price.”

Like many securities analysts, Gunderson assumed that Johnson & Johnson and Guidant would never have slashed Johnson & Johnson’s original merger offer of $76 a share down to $63 a share if they had known another potential bidder existed.

Turns out, they had known for nearly two weeks. J&J and Guidant struck the deal for the lower price on Nov. 14. The price was slashed after Guidant suffered a series of recalls and lawsuits related to its heart devices.

Now Guidant directors — and, ultimately, shareholders — face a tough choice: Do they take the lower buyout bid from the stable, deep-pocketed giant Johnson & Johnson or the higher bid from the fast-growing upstart Boston Scientific?

Boston Scientific’s offer of $72 a share, 14 percent higher than the revised bid by Johnson & Johnson, would seem to have the edge — especially in the world of Wall Street, where money rules.

That edge seemed even stronger Tuesday when Johnson & Johnson announced it saw no reason to raise its bid, saying that its offer represents the “full and fair value” for Guidant. While some analysts saw J&J’s comments as a flat refusal to up its bid, others saw it as the opening volley in what could be a bidding battle.

Whatever the case, A.G. Edwards securities analyst Jan Wald thinks Boston Scientific will win based on what he’s hearing from investors so far.

Guidant is more compatible with Boston Scientific than is Johnson & Johnson, said Wald, a former Guidant employee who still owns shares in the company.

After all, like Guidant and its lucrative, fast-growing market for implantable cardioverter defibrillators, Boston Scientific also has prospered because of one blockbuster heart device — its drug-coated stent that is the top seller in a $5 billion industry.

What’s more, both of those products were developed and are made in the Twin Cities area — Guidant’s ICDs at its cardiac rhythm management division in Arden Hills and Boston Scientific’s stents at its vascular division in Maple Grove.

As a growth company, Guidant’s strategy, workers and investors have more in common with similar-sized Boston Scientific than they do with New Brunswick, N.J.-based J&J, Wald said. For instance, Guidant investors are more likely to want to own stock in a growth company like Boston Scientific than a blue-chip global conglomerate like Johnson & Johnson.

But the Boston Scientific offer is filled with uncertainties and some risk, said David Huepel, a portfolio manager with Thrivent Financial in Minneapolis.

After all, the $25 billion deal would quadruple Boston Scientific’s debt load to more than $10 billion and hurt its near-term earnings for two years or more. What’s more, Guidant’s legal and regulatory problems — cited by J&J as the reason for shaving about $4 billion off its buyout offer — would add to Boston Scientific’s own pile of recent legal and regulatory troubles.

Both Moody’s Investors Services and Standard & Poor’s put Boston Scientific’s debt rating on a watch with negative implications after hearing of the offer. Even the prospect that the deal with Guidant goes through could prompt Moody’s to lower its risk ratings on the company.

In contrast, Johnson & Johnson has far deeper pockets than does Boston Scientific to help rebuild Guidant’s reputation and grow its key businesses, including ICDs. These life-saving devices became the subject of a series of recalls, lawsuits and regulatory actions over the summer following the death of a heart patient whose Guidant device failed.

With $6.3 billion in sales and $750 million in cash, Boston Scientific is only a fraction the size of J&J, which has $50 billion in sales and $15 billion in its coffers.

Boston Scientific’s deal faces a variety of hurdles as well, not the least of which is the aggressive time frame its executives have set to get the deal done — by the end of next quarter. The company needs to get regulatory approvals, shareholder approvals, and sell off Guidant’s vascular division, all significant obstacles, Huepel said. And there are some complex marketing agreements already in place between Johnson & Johnson and Guidant that might have to be unwound, he said.

“I think there’s still a reasonable shot that Johnson & Johnson will prevail,” Huepel said.

Johnson & Johnson said Tuesday it expects Guidant shareholders to vote on its bid at a meeting expected to take place in the first quarter of 2006.

It’s quite possible they will have two offers to vote on, Wald said.

In trading Tuesday, Guidant’s shares were down $1.10 to $66.88, Johnson & Johnson’s shares were down 58 cents to $60.47, and Boston Scientific’s were down 1 cent to $26.34.

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