Success of Guidant lawsuit against Johnson & Johnson depends on definition of murky legal term:

November 14, 2005

The fate of Guidant Corp.'s lawsuit against Johnson & Johnson depends on how a judge or jury defines a legal term that escapes easy definition.

The suit, filed Nov. 7 in federal court in New York, challenges J&J's contention that it doesn't have to complete its $25.4 billion Guidant purchase because the Indianapolis company has suffered a "material adverse effect" from product defects and recalls, among other troubles.

The term "material adverse effect" is a bit of a head-scratcher among analysts and attorneys.

"If you're looking for a hard-and-fast rule, you're not going to find it," said Jim Strain, a lawyer who specializes in mergers and acquisitions for the Indianapolis law firm of Sommer Barnard.

He said events that have a 5-percent impact on income or assets could be considered material.

The length of that impact also appears to be a key issue. In a landmark 2001 ruling, a Delaware judge said Arkansasbased Tyson Foods Inc. had to follow through with its purchase of South Dakota-based beef producer IBP Inc.

The judge said a downturn is material only if it is "consequential to the company's earnings power over a commercially reasonable period, which one would think would be measured in years rather than months."

John Chen, an analyst who covers mergers for New York-based Cathay Financial, said: "What Guidant will have to show is they're actually regaining the market share that they have lost previously."

Guidant on Nov. 7 announced the financial fallout from its recent problems. It said third-quarter sales were $795 million, a 14-percent drop from the same quarter last year. Profit for the quarter was $65 million, a 57-percent decline.

Chen thinks the company in the next six months can regain at least half the market share it lost, barring more bad news. He thinks Guidant will prevail in its lawsuit.

Strain believes otherwise. He cited the recent product recalls and newly disclosed investigations by the Securities and Exchange Commission and attorneys general from 34 states.

"If I were the adviser for the purchaser in such a situation, I would say that's a material adverse effect," he said.

Chen also sees a third possibility-that the companies will revive negotiations and strike a deal with revised terms.

"We still think J&J wants Guidant. They just want it at a cheaper price," he said.
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