J&J Cuts a New Deal for Guidant

After being put on indefinite hold and, at times, rumored to be off the table entirely, the planned merger of Johnson & Johnson Inc. (J&J; New Brunswick, NJ) and Guidant Corp. (Indianapolis) is going forward after all. Under the revised terms of the transaction, J&J has agreed to pay Guidant $21.5 billion in cash and stock—about 15% less than the original $25.4 billion deal struck last December. Adjusting for Guidant’s cash on hand at the close, both companies estimate the net cost of the acquisition to be about $19 billion.

The deal was settled at $63.03 for each Guidant share, approximately 17% less than the $76 share valuation associated with the original $25.4 billion deal. Guidant shareholders, who still must approve the sale, will receive $33.25 in cash and 0.493 share of J&J stock for each Guidant share, or about a 9% premium over the stock’s closing share price on the day the settlement was announced.

J&J’s Weldon: Reaching an accord.

Commenting on closing the deal, William C. Weldon, chair and CEO of J&J, said, “We are delighted that our companies have reached an accord. Our agreement demonstrates that we remain committed to the goal of together building an extraordinary cardiovascular business that can deliver better medical options sooner to millions of patients.”

Dollens and Cornelius: Exchanging the reins.

In a related action, Guidant has appointed James M. Cornelius as its interim chairman and CEO. Ron Dollens, Guidant CEO for the past 11 years, will pursue his previously announced retirement. Cornelius, noting that the agreement with J&J made sense for Guidant’s shareholders and employees, said the company was enthusiastic about the deal’s potential. “ The board believes that it is in the best interest of shareholders to proceed with the merger agreement at the revised terms. It amplifies the opportunity for us to do more for patients with cardiovascular disease through a union with Johnson & Johnson.”

Prior to the revised agreement, it was widely known that J&J was seeking a lower price than its initial offering 11 months ago. Since that time, Guidant has suffered round after round of damaging disclosures regarding its failure to properly notify physicians and patients about potential product failures and threats to patient safety. The company’s problems culminated in the recall of nearly 100,000 implantable cardioverter defibrillators and 200,000 pacemakers.

Following the deal’s approval by the Federal Trade Commission on November 2, the two parties reportedly had 48 hours to close. When J&J expressed reluctance to proceed, Guidant filed suit against the company in an attempt to force J&J to comply with the terms of the original agreement. J&J countered by asserting that Guidant’s problems had a “material adverse effect” on the company, and that J&J was therefore not legally obligated to close the deal.

J&J’s statements were generally seen as an attempt to get Guidant to lower its price rather than an indication that the company intended to walk away from the deal. In fact, most industry analysts speculate that both companies need one another. J&J has no products in the high-growth, high-margin cardiac rhythm management sector, and Guidant, in light of its recent woes, would have difficulty finding a new suitor.

If J&J were to balk on the deal, many analysts speculated the company would have difficulty lining up another acquisition in the heart rhythm device sector. An acquisition of industry leader Medtronic Inc. (Minneapolis) likely would not pass muster with anticompetitive regulations. And any overture to St. Jude Medical Inc. (St. Paul, MN), widely believed to have captured the number two position in rhythm management, probably would have brought swift legal reprisal from Guidant.

The deal with Guidant also falls in line with J&J’s stated goal of pursuing new initiatives in the medical device arena. Growth in its pharmaceutical division has slowed, and the company does not have any blockbuster drugs in the pipeline. Acquisitions in the high valuation, premium pharma industry are seen as cost prohibitive at this time, with medtech presenting a more-attractive route to growth. Medical devices currently represent about a third of J&J’s annual revenues.

Although Guidant is believed to have regained about 80% of its ICD and pacemaker market, the question remains as to how J&J will absorb the company. J&J could choose to keep Guidant’s brand intact or to integrate the company’s heart rhythm management devices into its Cordis division. Cordis Corp. (Miami Lakes, FL) manufactures the highly successful Cypher drug-eluting coronary stent, which has captured about 45% of the U.S. market for such products.

As part of the current deal, J&J will acquire Guidant’s formidable technological prowess in the design of stents and stent-delivery systems. Such a transfer of expertise could enable J&J to mount a significant challenge to the market-leading drug-eluting stent, Taxus, which is manufactured by Boston Scientific Corp. (Natick, MA). But for that to occur, J&J will have to ensure that it retains the top market talent it has paid for. Analysts recall that when J&J acquired Cordis in a hostile takeover, in 1994, its heavy-handed management approach during the transition led to the departure of some of Cordis’s top talent and also resulted in product development delays.

The J&J-Guidant deal is now expected to close in the first quarter of 2006. As a condition of FTC approval, J&J will have to divest some drug-eluting stents as well as blood vessel harvesting and sewing products. The European Commission, which approved the acquisition earlier this year, stipulated that J&J must give up its Cordis steerable guidewires and Guidant’s endovascular solutions businesses in Europe. J&J is currently pursuing buyers for those lines.

© 2005 Canon Communications LLC

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