Medical device maker Guidant Corp. on Friday night accepted an increased $24.2 billion buyout offer from Johnson & Johnson, turning aside a larger bid of nearly $25 billion from Boston Scientific Corp. in favor of a deal that Guidant hopes could be concluded more quickly.
The joint announcement of Guidant’s acceptance of J&J’s bid came about 24 hours after Boston Scientific increased its offer by about $330 million to $24.98 billion, and about three hours after passage of a deadline Boston Scientific had set for Guidant to respond.
The boards of both J&J and Guidant have unanimously approved the new J&J offer, which Guidant shareholders will consider in a Jan. 31 vote, the companies said. Guidant’s board had previously accepted J&J’s earlier $23.2 billion offer presented Wednesday night, but Boston Scientific’s move to raise its proposal Thursday night prompted J&J to increase its bid a second time.
Friday’s move came after more than a year of contentious dealmaking between Johnson & Johnson and Indianapolis-based Guidant, which sued J&J in November to try to force the New Brunswick, N.J.-based company to complete its acquisition of the device maker following recalls and regulatory investigations involving Guidant products. J&J reduced its original $25.4 billion offer to $21.5 billion. Boston Scientific entered the picture with an unsolicited offer Dec. 5.
Unlike Boston Scientific’s proposal, J&J’s offer has already cleared an antitrust review, which would speed the process toward closing a deal.
“This agreement with Johnson & Johnson provides significant financial value and certainty for shareholders,” James Cornelius, Guidant’s chairman and CEO, said in a statement.
The announcement left Boston Scientific facing the prospect of perhaps increasing its offer one more time — possibly to a level that would leave it with an uncomfortable amount of debt. The company also could walk away, or press its case directly to Guidant’s shareholders in hopes of reshaping the company’s board to bring in members who embrace its bid.
Phone calls seeking comment Friday night from spokespeople for Boston Scientific were not returned.
With Guidant’s shareholder vote on the J&J offer coming up Jan. 31, time could be running short for Boston Scientific. If it submits a new offer and Guidant’s board declares it superior to J&J’s bid, J&J would have five business days to counter it under terms of its agreement with Guidant.
“Boston Scientific will have to act fast and decisively in order to beat this J&J bid, in view of how the Guidant-J&J merger agreement is structured, and the proximity of the shareholder vote,” said merger expert Richard Langan of the law firm Nixon Peabody.
J&J and Boston Scientific, rivals in the market for drug-coated heart stents, are dueling for Guidant’s business in implantable defibrillators and pacemakers, a fast-growing $10 billion business in which neither suitor is a player.
Natick, Mass.-based Boston Scientific had included enticements in its latest proposal for Guidant shareholders to guard against the possibility that a regulatory review could cause delays. Boston Scientific pledged to make interest payments to Guidant shareholders if the transaction didn’t close by March 31, and also agreed to “divest all overlapping assets” if required.
J&J’s newest offer would pay $40.52 in cash and 0.493 shares of Johnson & Johnson stock for each outstanding Guidant share. J&J’s offer is worth about $71 per share — based on the $70.84 closing price for Guidant’s stock Friday — up from about $68 in its previous proposal.
Boston Scientific’s offer values Guidant at $73 per share and proposes to pay Guidant shareholders half in cash and half with its own shares.
Resistance from shareholders?
Many observers have said Guidant’s board could face resistance from shareholders attracted to Boston Scientific’s larger offering price. However, Guidant would have to pay a $675 million break-up fee to J&J if it walks away from their deal.
Because J&J’s offer is now only about $800 million below Boston Scientific’s bid, the fee would almost wipe out any financial gains from accepting the offer from Boston Scientific.
The stakes are high for Boston Scientific because it needs a pipeline of new products to spur growth because its drug-coated heart stents aren’t as lucrative as they once were amid new competition.
J&J also hopes to diversify because it expects to see more competition in stents. But it is far larger than Boston Scientific with a much broader range of products and greater financial capacity to endure a bidding war.
However, Boston Scientific has said the additional $9 billion in borrowing it would need to complete a Guidant deal wouldn’t lead debt rating agencies to cut the company’s investment-grade rating. Its bid for the device maker has recently drawn the interest of debt rating agencies. Moody’s Investors Service and Standard & Poor’s are reviewing the company for a possible downgrade, and Fitch Ratings placed Boston Scientific on a ratings watch.
Friday night’s J&J-Guidant announcement came after Guidant’s shares closed up 44 cents on the New York Stock Exchange, just as the 4 p.m. deadline Boston Scientific set on its offer passed with no response from Guidant. Boston Scientific shares rose 15 cents to close at $25.20 on the NYSE, with J&J shares falling 39 cents to close at $61.82.