Boston Scientific Makes Bid for Guidant

In early December, less than three weeks after Johnson & Johnson Inc. (J&J; New Brunswick, NJ) thought it had finally put the wraps on its nearly year-long ordeal to acquire Guidant Corp. (Indianapolis), who should emerge to put the whole deal on ice but rival cardiac device maker Boston Scientific Corp. (Natick, MA).

Boston Scientific’s sweetened bid of nearly $25 billion quickly garnered the interest of Guidant management and shareholders. It was about $4 billion more that J&J’s renegotiated offer, which Guidant appeared to accept reluctantly following months of damaging disclosures and recalls of nearly 300,000 of its implantable cardioverter defibrillators (ICDs) and cardiac pacemakers.

The bid is only $400,000 less than J&J’s original $25.4 billion offer, and was made just days after Boston Scientific was itself rumored to be a takeover target.

J&J may counter with a higher offer, but many analysts believe the company has dug in its heels and is concerned about paying more and then having to spend years and millions of dollars defending itself against a bevy of lawsuits stemming from Guidant’s past product woes. Just days after receiving the acquisition offer from Boston Scientific, Guidant disclosed new information linking additional deaths to its defective ICDs.

J&J’s Weldon: Strategic interest.

Indirectly commenting on the Boston Scientific bid, J&J chairman and CEO William C. Weldon said, “We continue to believe that the acquisition as agreed to by Johnson & Johnson and Guidant represents full and fair value based on extensive evaluation and due diligence and is in the best strategic interest of Guidant, its customers, and patients.”

Without the Guidant acquisition, J&J would continue its absence from the high-margin cardiac rhythm management (CRM) segment, a $9 billion market in the United States alone. The segment is expected to grow appreciably now that Medicare and private insurers are approving ICD coverage for thousands of new patients each year.

With pharmaceutical development flagging, J&J is seeking to strengthen its position in the medtech market, which now accounts for about one-third of the company’s $47.3 billion in annual sales. If J&J balks on the Guidant deal, many believe the company will set its sights on a new CRM acquisition. Since any designs on segment leader Medtronic Inc. (Minneapolis) likely would not clear the antitrust hurdle, the number-three player in the market, St. Jude Medical (St. Paul, MN), may emerge as a prime candidate.

Boston Scientific’s Nicholas: A superior bid?

Boston Scientific needs to broaden its product base as well, and the Guidant acquisition would make it a powerful, one-stop resource for a wide range of cardiovascular devices. Guidant’s CRM sales are expected to make a near-full recovery by the end of the first quarter of 2006, which may explain why Boston Scientific’s management does not appear to be terribly concerned about legal exposure going forward.

The Boston Scientific bid exceeds the company’s own market capitalization of around $21 billion. Nevertheless, the company says it has secured the financial backing needed to pursue and complete the deal.

Boston Scientific CEO Tobin: Dealing for growth.

Boston Scientific chairman Pete Nicholas said the merger “will create the world’s leading cardiovascular device company, accelerating diversification and growth.” CEO James Tobin described the move as “premised on growth, not cost cutting.”

Acknowledging the concern of some analysts regarding J&J’s reputation for heavy-handed management, Tobin added, “We plan to retain Guidant’s talented employee base, especially its dedicated sales and product development teams. Both Boston Scientific and Guidant have long traditions of technological innovation and excellence, and we are looking forward to bringing these two great organizations together for the benefit of our customers.”

In a letter to Guidant interim chairman and CEO James Cornelius, Nicholas and Tobin described their acquisition proposal as “superior, both financially and strategically” to J&J’s amended offer.

While no representative of Guidant’s executive management would comment publicly on the merger proposal, a brief company press release—issued just two days after Boston Scientific made its bid—stated that Guidant would “ provide information to Boston Scientific and enter into discussions with it regarding its recent proposal.”

If Guidant were to pull out of the deal with J&J, it would be subject to a $625 million termination fee.

At this juncture, Boston Scientific appears to have the edge to acquire Guidant, but surely not on the basis of resources available to wage a bidding war. Boston Scientific’s big advantage may be in its corporate culture of tenacity and risk-taking that some say J&J’s buttoned-up management cannot match.

In the weeks and months ahead, there could be lots of back-and-forth jockeying for position among the three players. Then again, one company might walk away and the Guidant deal could be completed sooner than expected.

© 2005 Canon Communications LLC

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