Guidant Corp. jilted longtime suitor Johnson & Johnson Wednesday in favor of a $27.2 billion offer from rival Boston Scientific Corp., ending one of the most highly charged bidding wars in years.
The move capped nearly two months of negotiations and sweetened deals from J&J and Boston Scientific, which saw the Indianapolis-based company as an opening to the $10.3 billion cardiac device market.
But Guidant also is grappling with months of product recalls and is less than a month away from the first of what could be several product liability trials. Securities analysts say it ultimately could be liable for as much as $2 billion in damages.
Shares of Boston Scientific and Guidant fell Wednesday on the New York Stock Exchange, an indication that some investors believed Boston Scientific’s $80-per-share offer was too high.
“Clearly, they paid a full price for it and there are uncertainties associated with Guidant,” said David A. Katz, chief investment officer at Matrix Asset Advisors in New York, which owns about 1.5 million shares of Natick, Mass.-based Boston Scientific. “But (the deal) does change the whole business and the franchise of Boston for the better, assuming they pull it off.”
Since June, Guidant has recalled or issued safety advisories on about 88,000 defibrillators and more than 200,000 pacemakers. At least seven deaths have been linked to the faulty devices.
The regulatory investigations and dozens of lawsuits that followed made J&J think twice about what it was willing to pay.
The New Brunswick, N.J.-based company initially offered $25.4 billion for Guidant in December 2004 but wavered after the recalls began. Guidant sued to close the deal, and the companies agreed to a revised J&J offer of $21.5 billion in November.
In December, Boston Scientific presented an unsolicited, $25 billion bid for Guidant, triggering the bidding war.
Guidant last week declared Boston Scientific’s latest offer superior to J&J’s top bid of $71 a share. A five-day period for J&J to respond expired at midnight without any action by the company.
J&J said Wednesday that topping its last $24.2 billion offer would not have been in the best interest of its shareholders.
John Putnam, an analyst with Stanford Group Co., said a higher bid by J&J would have hindered the health products company’s ability to negotiate future acquisitions.
“For them to bid more than they originally bid would have signaled to other potential acquisitions that they didn’t have the financial discipline they’ve always been known for,” he said.
The acquisition, expected to be completed at the end of the first quarter, must be approved by shareholders from both companies as well as regulators in the U.S. and Europe. No date has been set for the votes.
“We believe the transaction and the strategic rationale for this combination are in the best interests of our patients, employees, customers and shareholders — reflecting the full value of our firm,” Guidant CEO Jim Cornelius said in a statement.
In addition to the cash and stock deal, Boston Scientific will pay the $705 million breakup fee Guidant owes J&J for walking away.
Boston Scientific has said it is confident it can restore trust in Guidant’s pacemaker and defibrillator business.
“We look forward to working with Guidant to complete the transaction quickly and to creating a global leader in cardiovascular devices,” said Jim Tobin, Boston Scientific’s president and chief executive, in a statement Wednesday.
Combined, Boston Scientific and Guidant could have 2006 revenue of nearly $9 billion.
In filings with the Securities and Exchange Commission this month, Boston Scientific said Guidant’s pacemakers and defibrillators could account for nearly one-quarter of projected sales. The heart device market is expected to grow by nearly 25 percent by 2008.
That growth will likely offset any of Guidant’s legal liability that Boston Scientific may have to absorb.
“I think it’s good for Guidant shareholders,” said Jan Wald, an analyst with A.G. Edwards & Sons. “I think, even though it’s dilutive, and perhaps dilutive for a long time, it’s a good strategic move on Boston Scientific’s part.”
Boston Scientific plans to sell Guidant’s line of drug-coated stents to Abbott Laboratories Inc. for $6.4 billion in cash. That includes a $900 million loan and Abbott’s agreement to acquire $1.4 billion of Boston Scientific common stock.