Battle for Guidant Becomes Bidding War

On January 13th, when Guidant Corp. (Indianapolis) rejected a $73 per share acquisition offer from Boston Scientific Corp. (Natick, MA) in favor of a lower $71 per share bid from rival suitor Johnson & Johnson Inc. (J&J; New Brunswick, NJ), many industry analysts speculated that Guidant was more comfortable with the J&J offer in spite of its lower price. After all, the J&J deal had already cleared antitrust reviews in both the European Union and the United States, was likely to close much sooner than the Boston Scientific bid, and was backed by the financial resources of the world’s largest medtech firm. Others wondered if the Guidant board had an unwitting preference for sticking with J&J.

Regardless of the reasons for Guidant’s decision, speculation soon shifted to what Boston Scientific’s next move might be. Over the Martin Luther King holiday weekend, matters were eerily quiet, with no word from any of the players.

But as the business day broke on January 17th, Boston Scientific went for the long ball with an $80 per share offer—topping J&J’s bid by about 12%. Continuing its aggressive stance, Boston Scientific gave Guidant just hours to accept the deal by setting a 5 p.m. expiration time on the same day the deal was proposed.

Boston Scientific’s Nicholas and Tobin: Banking on superiority.

In communicating the terms of their “compelling” offer to Guidant CEO James M. Cornelius, Boston Scientific’s chairman Peter Nicholas and its president and CEO James Tobin said, “We are providing Guidant shareholders with certainty of completion, significant upside potential, and substantially more value today than the Johnson & Johnson transaction. By any objective measure, our offer is clearly superior to Johnson & Johnson’s.”

Guidant’s Cornelius: Reviewing all aspects.

Having previously rejected two higher price offers from Boston Scientific, Guidant’s board had already raised the ire of some of its larger stockholders. Many had called for a rejection of the J&J deal, which is set for a shareholder vote on January 31. Recognizing its fiduciary responsibilities to get the best deal—and perhaps fearing an all-out shareholder revolt if they rejected it—Guidant issued a statement acknowledging that Boston Scientific’s revised offer “is superior to the terms of the company’s current merger agreement with Johnson & Johnson.” According to the statement, Guidant “will review all aspects of the offer.”

Now that Guidant has acknowledged that the Boston Scientific offer is superior, J&J has until the close of business on January 25 to raise its bid or walk away from the deal. Regardless of whether J&J ups its offer or bolts, Guidant would have to pay a $705 million break-up fee if it accepts Boston Scientific’s proposal.

J&J’s Weldon: Considering next move.

In a statement, J&J described Boston Scientific’s latest proposal as “a highly dilutive and leveraged transaction based on extremely aggressive business projections and, as such, one that will not provide $80 per share in value to Guidant shareholders.” J&J said it will “consider its alternatives under the existing merger agreement with Guidant.”

Several analysts have raised concerns about the debt load that Boston Scientific will carry if the transaction is completed. But the company said that even with its amended offer, it will “continue to maintain a credit profile similar to that of its previous offers, including an investment-grade rating.”

One of the key components of the Boston Scientific offer involves an allied deal with Abbott (Abbott Park, IL). Under the terms of the amended agreement, Abbott would pay Boston Scientific $4.1 billion—up from the previous $3.8 billion—to acquire Guidant’s entire vascular business when the acquisition is completed. Abbott would also pay a total of $500 million when Guidant’s drug-eluting coronary stent is approved in the United States and Japan. Additionally, under the revised terms, Abbott would provide Boston Scientific with a five-year, $900 million loan—up from $700 million—and purchase $1.4 billion of Boston Scientific stock, giving it a 4% ownership of the company.

Boston Scientific asserts that by spinning off Guidant’s vascular business to Abbott, the proposed deal should not be encumbered by antitrust concerns. However, since Boston Scientific would retain rights to Guidant’s drug-eluting stent technologies, others are not so sure.

Regardless of the final outcome, the bidding war for Guidant readily attests to the potential of the cardiac rhythm management device market. With a global valuation of about $10 billion, the market for implantable cardioverter defibrillators and cardiac pacemakers is growing at an annual rate of 20%. Neither Boston Scientific nor J&J currently have products in this high-growth, high-margin segment, which is led by Medtronic Inc. (Minneapolis), followed by Guidant and St. Jude Medical Inc. (St.Paul, MN).

J&J is faced with slowing pharma sales and has no blockbuster drugs in its product pipeline. Although its Cypher drug-eluting stent has now captured about 45% of the market, sales of the devices are slowing as the market matures and replacement procedures are not needed as often as originally forecast. J&J has previously announced its intention to grow its medtech business, which currently accounts for about one-third of its annual revenues.

Boston Scientific has readily demonstrated both its aggressiveness and flexibility in pursuing the Guidant transaction, but the intensity of its actions has heightened the perception that the company might be a one-trick pony. Sales of its market-leading Taxus coronary stent currently account for about half of the company’s earnings. While its next-generation drug-eluting stent, Liberté, is expected to gain approval later this year, additional competitors are expected soon thereafter, forcing down prices. Like J&J, Boston Scientific needs to add to its medtech product portfolio in order to continue its near- and long-term growth.

With Boston Scientific’s latest offer, the stage in this 13-month-old acquisition drama is set for J&J’s next move.

© 2006 Canon Communications LLC

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