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Johnson & Johnson may nix Guidant deal

Johnson & Johnson indicated Wednesday it might cancel its planned $25.4 billion acquisition of struggling medical device maker Guidant Corp. even as federal regulators gave conditional approval for the deal.
/ Source: The Associated Press

Johnson & Johnson warned Wednesday it might pull out of a $25.4 billion deal to buy Guidant Corp. because of potential liability arising from the medical device maker’s sweeping product recalls and a regulatory investigation. But Guidant officials said J&J was legally bound to go through with the deal.

“Recent product and communications issues have certainly had an impact on our business in the near term,” Guidant chief executive Ronald W. Dollens said in a statement. “However, we believe that the fundamentals of our business are strong and our markets and products have attractive prospects for growth.”

Meanwhile, analysts said J&J, which makes health care products ranging from baby lotion to drug-coated heart stents, might be turning its focus to Guidant’s rival, St. Jude Medical Inc., in its quest to diversify.

“J&J needs something like Guidant to revitalize its growth,” said Jan Wald, an analyst with A.G. Edwards & Sons. “People are now thinking that if J&J does walk away, St. Jude is in their scopes.” St. Jude Medical, which makes pacemakers and defibrillators, is based in St. Paul, Minn.

St. Jude spokeswoman Angela Craig said the company does not comment on speculation.

Wednesday’s market speculation and corporate posturing came as the Federal Trade Commission gave conditional approval for the New Brunswick, N.J.-based J&J to acquire Guidant, which is based in Indianapolis.

J&J quickly issued a statement saying recent recalls of Guidant-made implantable devices and regulatory investigations have had a “material adverse effect” on Guidant and that it was not required to close the acquisition. J&J officials said negotiations to restructure the terms of the proposed buyout had not yielded a compromise.

“Johnson & Johnson cannot assure that the companies will resume those discussions or, if discussions do resume, whether they will be able to reach agreement on revised terms that would allow Johnson & Johnson to proceed with the transaction,” the statement said.

Pulling out of the agreement could cost J&J $700 million, according to the merger agreement. But if J&J can prove the recalls have adversely affected Guidant, it won’t have to pay the termination fee, said Randy Katz, an attorney specializing in mergers and acquisitions with Bryan Cave LLP in Irvine, Calif. He reviewed the agreement with The Associated Press.

Since 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, as well as a reported criminal investigation by the U.S. Food and Drug Administration.

Federal prosecutors in Boston and Minneapolis last week issued separate subpoenas seeking documents about Guidant’s devices and its Ventak Prizm R 2 and Contak Renewal R 1 and 2 defibrillators.

The J&J-Guidant deal was announced in December. Guidant shareholders overwhelmingly approved the deal April 27, and European regulators signed off in late August after requiring the combined company to sell operations in niche markets for cardiovascular devices to guarantee fair competition in the EU’s 25 member states.

The FTC said Wednesday that J&J would have to divest devices used in bypass graft surgery and allow another company to license certain drug-eluting stent technology to avoid violating federal laws regulating competition with the Guidant deal. The agency said J&J would also have to end its agreement to distribute certain products used in heart surgery.

J&J spokesman Jeffrey Leebaw declined to comment on the conditions.

The agreement between J&J and Guidant requires the deal be completed within two days of FTC approval.

Katz said Wednesday’s announcements give J&J the upper hand if it wants to renegotiate.

“I don’t think the deal is dead,” he said. “I think this is the time when J&J can begin to exert its negotiating leverage.”

John Putnam, an analyst with Stanford Group Co., said if the acquisition derails, the companies could face years of litigation.

“The reality is, J&J probably doesn’t care,” Putnam said. “It has the money to pay whatever breakup fee is involved. I don’t see somebody else walking in here and picking up Guidant.”

New financial terms would have to be approved by Guidant shareholders, analysts said.

The Guidant acquisition would be the largest business transaction for 119-year-old Johnson & Johnson, which makes medicines, skin and baby care products and contact lenses.

Thomas Gunderson, an analyst with Piper Jaffray in Minneapolis, said he wouldn’t be surprised if J&J instead looked at St. Jude. The company could help J&J diversify, he said.