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Guidant Spurns Boston Scientific

Posted on: Sunday, 15 January 2006, 12:00 CST

By Stephen Heuser, The Boston Globe

Jan. 14--Heart-device maker Guidant Corp. spurned the latest takeover bid from Boston Scientific Corp. last night, signing a new $24.2 billion deal with healthcare giant Johnson & Johnson, which boosted its previous offer by $1 billion in cash.

Guidant disclosed the new deal three hours after the deadline expired on a competing $25 billion offer by Boston Scientific.

"This agreement with Johnson & Johnson provides significant financial value and certainty for shareholders," Guidant chairman James Cornelius said in a statement.

Though Johnson & Johnson's offer still falls more than a half-billion dollars short of Boston Scientific's, analysts and merger specialists said the price could be attractive to shareholders. It includes more cash -- $40.52 a share to Boston Scientific's $36.50 -- and could close faster, since it already has been approved by federal antitrust regulators.

"I don't know if the game's over, but it's closer to the 9th inning than it was," said Jan Wald, an analyst for A.G. Edwards & Sons.

It was unclear last night whether Boston Scientific would respond with a higher offer. A company spokesman did not return calls for comment.

Although Boston Scientific is widely seen as aggressive and tenacious competitor, Wald said, the additional cash could make it hard for the Natick device maker to keep competing against one of America's largest corporations.

The prize in this bidding war is Guidant's valuable line of implantable cardiac defibrillators, electronic devices that prevent the heart from stopping suddenly. Guidant is the number two maker of the devices, a market expected to reach $10 billion in the next three years.

If Boston Scientific succeeds, it would become the world's biggest maker of heart devices and the most valuable public company in Massachusetts. It also would answer Wall Street's growing concern about flattening sales of its flagship product, the drug-coated coronary stent.

Boston Scientific first jumped into the fray in December by making a surprise $25 billion offer for the Indianapolis company, trying to lure it away from a $22 billion deal it had already signed with Johnson & Johnson.

Johnson & Johnson initially stood pat, saying its price represented "full value" for Guidant, but it boosted its bid twice this week.

Last night's agreement puts the ball back in Boston Scientific's court. Wald estimated that Boston Scientific could bid as high as $76 a share, or $26 billion, without hurting its bottom line or its bond rating, although others say that as the price climbs the company will be hampered by the need to assume more debt.

"Johnson & Johnson, if they need to, will just spend them into the ground," said Randy Katz, a California lawyer with the firm Bryan Cave who has worked on healthcare mergers and acquisitions. "Boston isn't a small company, but Johnson & Johnson is just enormous."

The move capped a tense day in which Guidant's board weighed a $73-per-share offer that Boston Scientific had made after 7 p.m. Thursday. The deal was $5 a share higher than the existing agreement with Johnson & Johnson, and laden with guarantees to reassure Guidant shareholders that they wouldn't lose money if the deal took longer than expected to complete.

It also came with a deadline of 4 p.m. yesterday.

As the clock ticked, Guidant shareholders publicly lobbied directors to pull out of the deal with Johnson & Johnson, raising the prospect of a tough proxy fight. Deephaven Capital Management, one of Guidant's largest shareholders, issued a letter saying it would vote against the Johnson & Johnson deal when shareholders met to approve it Jan. 31, echoing other shareholders who had weighed in earlier.

Shortly before 1 p.m., Boston Scientific released and then withdrew a statement granting Guidant an additional two hours of time to consider its offer. In the end, Guidant disclosed its new deal with Johnson & Johnson after 7 p.m.

As investors waited to see whether Boston Scientific would raise the stakes again, one merger specialist cautioned that aggressive bidding wars can often end with more damage to the winner than the loser.

"Generally when you have multiple bids, what you see is that the acquirer ends up overpaying," said Boston University finance professor Allen Michel, who said Boston Scientific needs to be careful about the amount of debt it takes on.

"If everything goes as expected, the cash flow is big enough to pay off the debt," he said, "but things don't always go as expected."

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GDT, BSX, JNJ, AGE,

Source: The Boston Globe

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