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BEHIND THE NEWS: Guidant sale not so sweet for holders of buyer's stock

November 6, 2006

With almost every passing day, Boston Scientific Inc.'s $27 billion purchase of India n a p o l i s - b a s e d Guidant Corp. looks like a bigger fiasco-for the buyer, that is.

Whether it was bad for the sellers-Guidant shareholders-is a trickier question. They received a stew of stock and cash in the deal and fared splendidly if they immediately sold their shares.

But if they didn't, Massachusettsbased Boston Scientific's $80-a-share offer has lost its glow. Since the deal closed in April, Boston Scientific shares have slid 29 percent. Meanwhile, shares of Johnson & Johnson, the losing bidder for Guidant, are up 15 percent.

The upshot: Based on current prices, shareholders would have about $5 more per Guidant share if they'd gone with J&J.

One of Indiana's top stockbrokers, Gene Tanner, vice chairman of NatCity Investments, figures less than 20 percent of his clients in Guidant cashed out before or right after the deal closed.

"I know some sold, but not a lot. Darn it," Tanner said.

What's gone wrong?

For one, the product-liability problems that led Johnson & Johnson to scale back its original $76-a-share bid for Guidant have escalated. In June, Boston Scientific announced recalls or warnings on nearly 50,000 Guidant cardiac devices and said it could take as long as two years to fix safety problems.

But Boston Scientific also has its own challenges.

Its leading product is stents-tiny metal scaffolds that prop open obstructed heart vessels. In particular, it was a pioneer in development of drug-coated stents, a product doctors called a huge advancement. They hailed the new devices for causing less of the scarring that sometimes leads to reclogging of newly opened arteries.

At least that's what they used to say. Now, stent sales are falling, and new evidence indicates drug-coated stents can sometimes cause fatal blood clots months or years after implantation. The Food and Drug Administration early next month will hold hearings on whether to issue new stent safety guidelines.

It all adds up to lots of uncertainty for Boston Scientific at a time it has little financial cushion.

The whopping Guidant acquisition swelled its debt to nearly $9 billion, about what the combined company is expected to report in revenue this year.

Boston Scientific CEO Jim Tobin is wearing his best game face. In a conference with analysts late last month, he acknowledged that making the Guidant purchase pay off would take longer than expected, but said he had "no doubt" it would.

Perhaps he's right, but already the court of public opinion has ruled.

"The second worst deal ever," opined Fortune magazine, second only to America Online's $102 billion acquisition of Time Warner. It reported that Guidant is generating zero profit.

"There has to be some high-fives going around [at J&J] that they dodged that bullet," Piper Jaffray analyst Thom Gunderson told an Associated Press reporter.

Indeed, J&J, which last spring was pilloried for allowing Boston Scientific to wrest Guidant from its grasp, might end up with the last laugh.

Boston Scientific already has paid a $705 million fee to J&J for breaking up its Guidant deal.

In September, J&J filed a breach-ofcontract lawsuit seeking another $5.5 billion. It charges Guidant broke its sales pact with J&J by leaking confidential information to Illinois-based Abbott Laboratories.

To address antitrust concerns and make the Guidant acquisition manageable for Boston Scientific, Abbott ultimately bought part of Guidant for $4.6 billion. Boston Scientific says the lawsuit has no merit.

"The complaint makes for entertaining reading," the bond-rating agency Gimme Credit said in a report.

Especially for shareholders with no skin in the game. For Guidant shareholders who've held on and weathered the company's setbacks, "it sure has hurt," Tanner said.

Big year for stocks

Unless the last two months of 2006 are downright bearish, this will go down as a great year for many Hoosier stocks.

Through the end of October, 54 of 81 Indiana-based stocks tracked by IBJ were up for the year, and 36 had advanced at least 10 percent.

Leading the way were software maker Interactive Intelligence (up 230 percent) and furniture maker Kimball Industries (up 137 percent).

The gains are in step with the overall market.

Over the same span, the Dow Jones industrial average climbed 13 percent and the S&P 500 10 percent.

Big losers included radio broadcaster Emmis Communications Corp. (off 38 percent) and athletic shoe retailer Finish Line Inc. (off 26 percent).
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