$27b Bid Gives Lead to Boston Scientific
By Stephen Heuser, The Boston Globe
Jan. 18–Guidant Corp. last night declared a $27 billion takeover bid by Boston Scientific Corp. superior to its longstanding deal with Johnson & Johnson, giving Boston Scientific the upper hand in its bid to become the world’s biggest cardiovascular device company.
Guidant’s decision gave Boston Scientific its first victory in a monthlong bidding war that has become the most intense fight over a healthcare company in years — and the biggest Massachusetts takeover battle in memory.
“In the life-science space I can’t remember the bidding being as aggressive,” said Benjamin Conway, the head of life science investment banking for Kaufman & Co. of Boston.
Medical device maker Boston Scientific surprised Wall Street in early December by trying to derail Johnson & Johnson’s $21 billion bid to buy Guidant with a $25 billion offer. Its entry plunged the fast-growing Natick company into direct competition with a far larger rival, a $180 billion conglomerate that makes drugs, devices, and household products such as Band-Aid.
Despite a series of higher offers, Boston Scientific has struggled for traction with Guidant’s board of directors, which twice in the past week has signed sweetened deals with Johnson & Johnson rather than accepting a higher, though riskier, offer from Boston Scientific. Johnson & Johnson has cleared its purchase with federal antitrust regulators, and shareholders for Guidant, which is based in Indianapolis, are scheduled to vote on the deal Jan. 31.
Yesterday morning Boston Scientific founder and chairman Pete Nicholas sharply raised the stakes by offering to buy Guidant at $80 a share — a dramatic jump over the $71-a-share deal Guidant had with Johnson & Johnson — and set a 5 p.m. deadline, giving Guidant’s board nine hours to respond.
Shortly after 4:30 p.m., Guidant gave the nod to Boston Scientific, declaring its offer “superior to the terms of the company’s current merger agreement with Johnson & Johnson.”
Johnson & Johnson now has five business days to win Guidant back with a higher bid, according to the terms of the deal between the companies.
Johnson & Johnson’s only response yesterday was a terse statement that knocked Boston’s offer as “a highly dilutive and leveraged transaction” that “will not provide $80 in value to Guidant shareholders.”
The statement also said Johnson & Johnson would “consider its alternatives under the existing merger agreement with Guidant.” A Johnson & Johnson spokesman, reached by phone, declined to elaborate.
If Guidant accepts a bid from a competing firm, Johnson & Johnson is entitled to a breakup fee of $705 million.
“I think it’s an amazing turn of events,” said Jan Wald, a medical device analyst with A.G. Edwards & Sons.
As a much smaller company than Johnson & Johnson — worth only $20 billion to the New Jersey company’s $182 billion — Boston Scientific needs to take out considerable debt to fund the purchase. That had fueled concern among bond rating agencies, who could downgrade the company’s debt if they think its move is too risky.
“Getting into a bidding war with J&J is bad enough, but getting into a cash-throwing contest with J&J is even scarier,” wrote bond analyst Carol Levenson in a research note yesterday.
Boston Scientific’s stock also took a hit from investors yesterday, dropping 5 percent from $25.20 to a two-month low of $23.90 after yesterday’s offer was disclosed.
The debt risk is amplified by Guidant’s troubles over the past year. The company makes implantable defibrillators, tiny and highly profitable devices to keep the heart from stopping. Last year after revelations that its defibrillators could short-circuit and fail to deliver a lifesaving shock to patients when needed, the company recalled more than 100,000 defibrillators. Several patient deaths have been linked to the problem.
“Unlike any other company they’ve [acquired] recently, they have to fix this,” said Thomas Gunderson, a medical device analyst with Piper Jaffray & Co. “This has got some dents in it, and they’ve got to get it back in shape again.”
In chasing Guidant, Boston Scientific is trying to reclaim its cachet as one of Wall Street’s favorite growth companies. Its drug-coated Taxus stent, a tiny mesh tube that holds cleared coronary arteries open, became one of the fastest-selling medical products in history but quickly plateaued, and last year executives struggled to convince Wall Street investors that they have any products with a similar growth potential.
The company sees that growth potential in Guidant, which holds a number-two share in the expanding multibillion-dollar market for devices to manage heart rhythm. To buy Guidant, though, requires a complex leveraged deal in which Boston Scientific would swallow a company with a market value several billion dollars higher than its own. Analysts said the deal was the culmination of a long history of acquisitions that helped Boston Scientific build itself into one of the country’s top device makers.
“Boston Scientific has always been impressive — they’ve done so many acquisitions over the years,” said Gunderson, the analyst. “They have a SWAT team that is just at its peak — they come in and say hey, we’re going to do a deal, and boom.”
In a five-page public letter sent yesterday to Guidant’s board of directors, Boston Scientific chairman Nicholas extolled the advantages of a merged company, calling it an “industry-transforming combination” and saying Guidant shareholders stood to gain far more from a Boston Scientific takeover than from the deal the company signed with Johnson & Johnson.
He also revealed that Boston Scientific had been in talks with the Federal Trade Commission to prevent antitrust issues that could block or delay a merger of two large makers of medical devices. For example, Boston Scientific and Guidant are two of the world’s largest makers of catheters and other devices that allow doctors to perform minimally invasive surgery.
To allay antitrust concerns, Boston Scientific is proposing to sell off Guidant’s vascular intervention business to Abbott Laboratories, and to share marketing rights with Abbott for a drug-coated stent that Guidant is expected to introduce in 2008.
Nicholas, in his letter, said these moves were “specifically crafted” to address antitrust issues and had been “discussed extensively with the FTC.”
Guidant’s board and shareholders had expressed concern that a deal with Boston Scientific was less of a sure thing than Johnson & Johnson’s, which already has been cleared by the commission.
Abbott has worked closely with Boston Scientific to shape its bid, agreeing to pay $4.1 billion for Guidant’s vascular intervention business. Abbott also agreed to lend Boston Scientific $900 million at a low interest rate, and buy $1.4 billion in Boston Scientific stock, about 4 percent of the company.
In addition to giving Abbott a valuable new line of products, the arrangement provides several billion dollars in cash that helped Boston Scientific match an offer from one of the world’s largest healthcare conglomerates. Until yesterday, Johnson & Johnson’s purchase offers consistently offered more cash than Boston Scientific, which relied more heavily on company stock.
Yesterday’s $27 billion bid from Boston Scientific offered $42 a share in cash and $38 a share in stock, trumping Johnson & Johnson’s most recent bid of $24.2 billion, which broke down to $40.52 a share in cash and $30.48 a share in stock.
Johnson & Johnson, which originally signed a deal to buy Guidant for $25 billion in December 2004, seized on Guidant’s woes to haggle its price down below $22 billion, or $63 a share, in November. Boston Scientific then jumped in with its offer at $72 a share, triggering a fierce round of back-and-forth bids with Johnson & Johnson.
“The thing that’s keeping this tennis match going longer is that both sides, if they can’t have it, they really don’t want the other guy to have it,” said Gunderson, the analyst.
THE BATTLE FOR GUIDANT
For the latest news on Boston Scientific and other Globe coverage of the takeover fight, go to boston.com/business.
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