J&J Rival Now Leads Guidant Bid War
Medical device maker Guidant Corp. abandoned its support for a $24.2 billion acquisition bid from Johnson & Johnson in favor of Tuesday's far richer $27.2 billion offer from Boston Scientific Corp.
The shift came after Guidant's board had twice rejected higher offers from Boston Scientific in favor of J&J proposals that Guidant had said offered a speedier route to completion after more than 13 months of contentious dealmaking.
But Boston Scientific on Tuesday morning increased the stakes again by offering a price more than $2 billion richer than its previous bid last Thursday — a far higher increase than it had made in previous rounds. Boston Scientific added other enticements as well, and sought to sway Guidant's board in its favor by negotiating new terms in a third-party deal that will raise more cash for Boston Scientific to complete a Guidant acquisition.
Guidant said in a brief statement that its board determined that Boston Scientific's revised offer "is superior to the terms of the company's current merger agreement with Johnson & Johnson." The statement did not elaborate.
In a short statement, Johnson & Johnson said it believed Boston Scientific's proposal would hurt the earnings potential of the combined company and leave it saddled with too much debt. J&J also said the proposal was based on "extremely aggressive business projections."
"The company will consider its alternatives under the existing merger agreement with Guidant," J&J said.
Natick, Mass.-based Boston Scientific said, "We look forward to working together to complete the transaction."
Shareholders are to vote on J&J's offer Jan. 31. But with Indianapolis-based Guidant declaring Boston Scientific's bid superior, J&J now has five business days — until the end of business Jan. 24 — to counter it under the terms of its agreement with Guidant. Boston Scientific's offer will remain open for formal acceptance by Guidant until Jan. 25.
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.
Tuesday's big price increase from Boston Scientific led analysts to speculate the bid was a last-ditch attempt to trump J&J, which is based in New Brunswick, N.J.
With its latest $80-per-share offer, Boston Scientific "is clearly playing to win," said analyst Dhulsini De Zoysa of SG Cowen & Co.
She said J&J — a far larger company than Boston Scientific — has the financial capacity to increase its offer from its current $71 a share. But she said J&J is unlikely to go above the $76-per-share proposal it initially presented in December 2004, before product recalls and safety warnings at Guidant led J&J to reduce its offer.
"I think it would be very difficult for J&J to defend an offer above its original $76-a-share bid," De Zoysa said. "A solution that might satisfy the Guidant board as well as shareholders is to offer $76 a share with a higher cash component, or offer to pay all in cash."
"By restructuring the terms, they could make a final offer that is attractive in that it offers the certainty of cash."
More cash would reduce the risks Guidant shareholders would face from fluctuations in the stock price of the winning suitor after a deal closes.
J&J's current offer calls for $40.52 in cash and 0.493 shares of stock for each Guidant share.
Boston Scientific had previously offered an equal amount of cash and stock, but boosted the cash component Tuesday by offering $42 in cash and $38 in stock for each Guidant share.
It said its latest offer amounts to a premium of $9 per share, or a total $3.3 billion, over the latest J&J offer.
The bidding war began Dec. 5 when Boston Scientific made an unsolicited $24.6 billion offer
Boston Scientific bid up to $25 billion last Thursday. J&J responded Friday with a $24.2 billion offer that Guidant's board accepted, citing that deal's greater certainty and its clearance of an antitrust review.
While Boston Scientific's offer remains higher, Guidant would have to pay a $705 million break-up fee to J&J if it walks away from their deal. The fee had been set at $625 million, but has been increased twice in the most recent J&J offers.
One major Guidant shareholder that has been pressing J&J to side with Boston Scientific said Tuesday's offer should leave "no debate."
"Boston Scientific's $80-per-share offer is not even in the same zip code as J&J's $71 offer," said Ivan Krsticevic, a senior portfolio manager at Elliott Associates, which holds about 3 million Guidant shares, or about a 1 percent stake.
Boston Scientific's latest bid amends a separate deal announced Jan. 8 to address antitrust issues and fears that a regulatory review could slow any deal. The new proposal raises the price that Abbott Laboratories Inc. will pay for Guidant's vascular business from $3.8 billion to $4.1 billion.
Abbott, based near Chicago, also will increase the amount it lends Boston Scientific to $900 million from $700 million, and Abbott will buy $1.4 billion worth of Boston Scientific's stock — deals that are contingent on Boston Scientific acquiring Guidant.
Boston Scientific said the revisions would give it an initial $6.4 billion from Abbott to help close a Guidant deal. Boston Scientific has said it would have to borrow about $9 billion to conclude a deal — an amount it says wouldn't lead debt rating agencies to cut the company's investment-grade rating. Nevertheless, the agencies are keeping a close watch.
Boston Scientific's latest offer also includes an expanded stock "collar" to protect Guidant shareholders in case of a swing in Boston Scientific's stock before a shareholder vote. Boston Scientific also pledges to pay interest to Guidant shareholders if the transaction doesn't close by March 31.
Guidant's support of Boston Scientific's bid as superior came after Guidant shares rose $5.38, or 7.6 percent, to close at $76.22 on the New York Stock Exchange. Shares of Boston Scientific fell $1.30, or 5.2 percent, to close at $23.90, and J&J shares closed down 54 cents at $61.28.