For Boston Scientific Corp., the third time was a charm — even if the price it must pay for a rival medical device maker is nearly $3 billion more than when it sparked a bidding war.
Guidant Corp. spurned Boston Scientific’s first two buyout offers in favor of Guidant’s standing deal with Johnson & Johnson.
So instead of bidding higher by another few hundred million dollars, Boston Scientific ponied up in a big way Tuesday, raising its offer from about $25 billion to $27.2 billion.
Less than nine hours later, Boston Scientific got the change of heart it wanted. Guidant embraced Boston Scientific’s proposal as superior to J&J’s latest offer, which is about $3 billion smaller but could offer a speedier route to a completed deal.
J&J now must decide whether to bid higher or walk away with a $705 million break-up fee. The fee had been set at $625 million, but has been increased twice in the most recent J&J offers.
Tuesday’s price hike, and other new enticements, left some observers surprised at the lengths Boston Scientific is going to buy Guidant and acquire its lucrative business in implantable heart defibrillators and pacemakers.
Some considered it a last-ditch effort to quickly unseat J&J rather than draw out the process with additional modest boosts.
“I didn’t expect a knock-your-socks-off bid,” said Nancy Havens, manager of Havens Advisors, a New York-based hedge fund and Guidant investor. “This has gone higher than anybody ever anticipated.”
“But I think this is a very, very smart move for Boston Scientific ... They’ve taken the upper hand in this.”
J&J and Boston Scientific are close rivals in the market for drug-coated heart stents. But they face increasing competition in that niche and are dueling to move into defibrillators and pacemakers, a fast-growing $10 billion business in which neither suitor is a player.
The bidding war began Dec. 5 when Boston Scientific made an unsolicited $24.6 billion offer — a move that came after J&J reduced its price from the original $25.4 billion to $21.5 billion because of safety problems involving Guidant products. Since June, Guidant has recalled or issued warnings about 88,000 heart defibrillators and almost 200,000 pacemakers, leading to lawsuits and regulatory investigations.
Guidant said in a brief statement Tuesday that its board determined that Boston Scientific’s revised offer is “superior” to its standing deal with J&J.
Johnson & Johnson responded by saying Boston Scientific’s proposal would hurt the earnings potential of the combined company and leave it saddled with too much debt. J&J also said the proposal was based on “extremely aggressive business projections.”
“The company will consider its alternatives under the existing merger agreement with Guidant,” said New Brunswick, N.J.-based J&J.
Shareholders are to vote on J&J’s offer Jan. 31. But with Indianapolis-based Guidant declaring Boston Scientific’s bid superior, J&J now has five business days — until the end of business Jan. 24 — to counter it under the terms of its agreement with Guidant. The offer from Natick, Mass.-based Boston Scientific will remain open for formal acceptance by Guidant until Jan. 25.
Analyst Dhulsini De Zoysa of SG Cowen & Co. said J&J — a far larger company than Boston Scientific — has the financial capacity to increase its offer from its current $71 a share, which compares with Boston Scientific’s $80-a-share offer. But she said J&J is unlikely to go above the $76-per-share proposal it initially presented in December 2004.
“A solution that might satisfy the Guidant board as well as shareholders is to offer $76 a share with a higher cash component, or offer to pay all in cash,” De Zoysa said. “By restructuring the terms, they could make a final offer that is attractive in that it offers the certainty of cash.”
More cash would reduce the risks Guidant shareholders would face from fluctuations in the stock price of the winning suitor after a deal closes.
J&J’s current offer calls for $40.52 in cash and 0.493 shares of stock for each Guidant share. Boston Scientific had previously offered an equal amount of cash and stock, but boosted the cash component Tuesday by offering $42 in cash and $38 in stock for each Guidant share.
Boston Scientific’s latest bid amends a separate deal announced Jan. 8 to address antitrust issues and fears that a regulatory review could slow any deal. The new proposal raises the price that Abbott Laboratories Inc. will pay for Guidant’s vascular business from $3.8 billion to $4.1 billion.
Abbott, based near Chicago, also will increase the amount it lends Boston Scientific to $900 million from $700 million, and Abbott will buy $1.4 billion worth of Boston Scientific’s stock — deals that are contingent on Boston Scientific acquiring Guidant.
Boston Scientific said it would receive an initial $6.4 billion from Abbott to help close a Guidant deal. Boston Scientific says the roughly $9 billion it would have to borrow to conclude a deal wouldn’t lead debt rating agencies to cut the company’s investment-grade rating. Nevertheless, the agencies are keeping a close watch.
One major Guidant shareholder that has been pressing J&J to side with Boston Scientific said Tuesday’s offer should leave “no debate.”
“Boston Scientific’s $80-per-share offer is not even in the same zip code as J&J’s $71 offer,” said Ivan Krsticevic, a portfolio manager at Elliott Associates, which holds about 3 million Guidant shares, or about a 1 percent stake.