updated 11/7/2005 9:05:08 PM ET 2005-11-08T02:05:08

Guidant Corp. sued Johnson & Johnson on Monday in an attempt to force it to complete a $25.4 billion acquisition of the medical-device maker, which has been roiled by a series of recalls.

Analysts and lawyers said the suit signals the two sides have failed to renegotiate the acquisition slated to close last week and that it will likely dissolve. Shares of Indianapolis-based Guidant tumbled nearly 5 percent in early trading Monday, before recovering slightly. J&J shares rose.

Meanwhile, Guidant’s problems mounted as it reported sharply lower third-quarter earnings on Monday and disclosed it was under investigation by the Securities and Exchange Commission. The company said the SEC investigation concerns product disclosures and trading in the company stock. SEC spokesman John Heine said the agency does not confirm, deny or comment on ongoing investigations.

“I don’t see where this deal can be salvaged,” said Robert Gold, an analyst at Standard & Poor’s, who downgraded Guidant stock Monday to a strong sell from a hold. “I don’t think J&J wants to risk its own reputation ... I think Guidant is an impaired asset.”

Moody’s Investors Service also said Monday it was more likely to cut Guidant’s credit ratings because the transaction didn’t occur as planned.

Guidant’s lawsuit, filed in U.S. District Court in Manhattan, comes after Friday’s deadline passed for completing the deal as agreed by the two companies Dec. 15, 2004.

It followed days of speculation that J&J would walk away after warning last Wednesday that it was no longer obligated to complete the purchase because the recalls have had a material adverse effect on Guidant, triggering an out clause in the contract. J&J said the two companies had discussed restructuring the transaction, though no agreement had been reached.

The original deal valued Guidant at $76 per share in a combination of stock and cash. Analysts said the speculation on Wall Street was that New Brunswick, N.J.-based-J&J was willing to pay in the low $60 per share range for Guidant while Guidant was holding out for a price in the high $60 per share range.

“I think if the two sides were close to a deal you wouldn’t see a lawsuit,” said Robert Faulkner, an analyst at JMP Securities.

In a statement, J&J said it “will vigorously oppose the lawsuit and take all necessary action to enforce its rights under the merger agreement.” The company declined further comment.

Guidant shares fell $1.40, or 2.4 percent, to close at $57.52 Monday on the New York Stock Exchange, while Johnson & Johnson shares rose 55 cents to close at $61.43.

The Federal Trade Commission last week conditionally approved the acquisition.

Guidant also declined comment, but the lawsuit said the recalls and related problems don’t constitute the material adverse event that would have allowed J&J to walk away from the deal. J&J can escape paying a $700 million breakup fee if it can show the recalls have hurt Guidant — and analysts said J&J has a major advantage given all of Guidant’s misfortunes since the deal was announced.

Starting in June, Guidant has recalled or issued warnings about 88,000 heart defibrillators — including its top seller, the Contak Renewal 3 — and almost 200,000 pacemakers because of reported malfunctions. The company faces multiple lawsuits from patients and shareholders and is also under investigation by the Justice Department. Last week, New York Attorney General Eliot Spitzer sued Guidant for fraud, accusing it of not telling doctors about a potentially fatal flaw in some of its defibrillators.

On Monday, Guidant also reported its third quarter dropped 57 percent to $65.4 million, or 20 cents per share, from $153.6 million, or 48 cents per share, a year ago. The latest figure includes costs of $28 million, or 6 cents per share, related to regulatory actions on its devices. Excluding items, the company said it would have earned 32 cents per share in the latest quarter.

Revenue fell 14 percent to $795 million from $924.5 million.

Analysts surveyed by Thomson Financial predicted third-quarter earnings of 49 cents per share on sales of $884.2 million.

“I think J&J has a claim. I don’t think they are going to have to pay Guidant,” said Joanne Wuensch, a managing director at Harris Nesbitt.

She estimates Guidant shares are worth about $67 a share on a stand alone basis.

But Gold thinks the stock is worth only $48 a share. “Guidant has lost of lot of market share and they don’t have a big pipeline,” Gold said.

He estimated that before its problems, Guidant had about one-third of the $5.5 defibrillator market. Now he thinks Guidant only commands in the low 20 percent range of the market as Medtronic Inc. and St. Jude Medical Inc. take advantage of its weakness. Guidant’s defibrillator sales fell 26 percent during the quarter.

Thomas Gunderson, an analyst with Piper Jaffrey, thinks the odds are less likely that the deal will be consummated but thinks there may be a chance because it still makes sense. Gunderson says Guidant’s defibrillators and pace makers perfectly complement J&J’s cardiac products which includes stents, which are metal scaffolds that prop open arteries.

“I think they are a good match,” Gunderson said.

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