Boston Scientific's offer not as sweet as it seems:

February 6, 2006

Boston Scientific's offer not as sweet as it seems

Now that Guidant Corp. has agreed to be acquired by Boston Scientific Corp. for $27 billion, or $80 a share, investors in the Indianapolis company can rest easy, right?

Not really, a close reading of the medical-device companies' merger agreement shows.

It turns out Guidant shareholders are entitled to $80 a share in cash and stock only if the average closing price of Boston Scientific's stock in the 20 days before the deal closes is at least $22.62 a share. That seemed a sure thing until recently. The stock was trading above $25 a share as of mid-January.

But then investors began fretting Boston Scientific was overpaying for Guidant, causing the Massachusetts company's stock to swoon. The stock lost more ground after Boston Scientific disclosed Jan. 26 that regulators had harshly criticized its safety procedures, triggering a review that likely will delay the introduction of new products.

Boston Scientific shares last week dipped as low as $20.57 before rebounding to $21.85-still well below the $22.62 threshold to make full payment.

A lesser price?

Under the formula in the merger agreement, if the average closing price of the stock in the 20 days before the deal closes were $21, Guidant shareholders would end up receiving $77.27 a share. More pessimistic, if the average closing price slid to $17, the shareholders would end up with $70.55, just shy of the $71-a-share offer from New Jerseybased Johnson & Johnson that Guidant's board rejected.

Dry stuff, perhaps, but also important.

Just ask former shareholders of IPALCO Enterprises Inc., who know firsthand that a few words in a thick merger document can take the financial glow off a deal.

IPALCO announced in July 2000 that it would be purchased by Virginia-based AES Corp. for $25 a share, a 16-percent premium to the Indianapolis company's stock price a day earlier.

Here's the catch: AES paid with its shares, using a formula that valued them at $53.99, even though the stock had fallen to $47.75 by the time the deal closed in March 2001. As a result, IPALCO shareholders ended up with almost no profit from the sale. Worse, AES shares later tanked, leaving the shareholders with huge losses.

Determined to close

If there's any consolation for Guidant investors, it's that Boston Scientific seems hell bent on living up to its end of the deal-no matter what.

Guidant has plenty on its plate that might understandably rattle a buyer. Last spring, The New York Times reported the company had not told doctors about a rare

heart-defibrillator defect, and over the summer the company announced a string of recalls. Questions about disclosure, product safety and stock sales by insiders spawned investigations by the Department of Justice, the Securities and Exchange Commission and New York Attorney General Eliot Spitzer.

"I think Boston Scientific is fully aware of all the potential liability issues surrounding Guidant," said Eli Kammerman, an analyst with Cathay Financial in New York.

Under the terms of the merger agreement, he said, "Boston Scientific has essentially guaranteed there will be no obstacles to closing."

Indeed, the Massachusetts firm, which already has agreed to sell part of Guidant to Illinois-based Abbott Laboratories for $4.1 billion, also is committing to make any divestitures needed to win antitrust approval.

Further, Boston Scientific is shouldering the risk that winning such approvals could drag on for months. It says it plans to close the purchase before April 1. If it misses that target, the company says, it will pay Guidant shareholders 1.3-centsper-share-per-day until closing.

Investors uneasy

Still, unease abounds. Guidant shares were trading late last week for about $73.60, a sign investors aren't counting on collecting the $80 a share Boston Scientific dangled. Guidant shares were trading at nearly a 9-percent discount to that offer, the second-biggest percentage spread among 64 deals tracked by Bloomberg News.

If Boston Scientific shares lost even more value, who knows what might happen? Here's one intriguing scenario: J&J could re-enter the fray, potentially teaming with Minneapolis-based medicaldevice maker Medtronic Inc. to boost its $71-a-share offer, analysts speculate.

Stay tuned. The surreal Guidant sale saga might not be over yet.
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