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Game not over for J&J: Johnson & Johnson may still beat rival in fight for Guidant

December 12, 2005

Boston Scientific Corp. earned instant front-runner status in the bidding war for Guidant Corp. when it unveiled a $25 billion offer on Dec. 5 that trumped a Johnson & Johnson proposal by more than $3 billion.

However, market watchers say, J&J can regain the lead simply by counterpunching with a comparable offer.

They say the immense New Jersey-based conglomerate offers more stability and is the better long-term option for Guidant shareholders who want to hold onto the buyer's stock after the sale.

"The J&J stock is better currency," said John Chen, an analyst who covers mergers for New York-based Cathay Financial.

Boston Scientific proposes paying $72 for each Guidant share, half in stock and half in cash. In contrast, J&J reached an agreement last month to buy Guidant for $63.08, with slightly more than half paid in cash.

Guidant said Dec. 7 that it will open discussions with Boston Scientific but its board "is not making any recommendation at this time with respect to Boston Scientific's proposal." A day earlier, Johnson & Johnson released a statement saying its offer represented "full and fair value" for Guidant and gave no indi- cation it planned to raise its price.

Chen dismissed J&J's stance as posturing.

"What's full and fair value is ultimately going to be up to Guidant's board and Guidant's shareholders to decide," he said, adding that J&J has invested too much in the proposal to walk away. "They've spent a lot of time analyzing the company, and they've been in the midst of merger reviews for over a year now, so I think they'll come back and offer something."

J&J in December 2004 agreed to buy Guidant for $76 a share, a bid then valued at $25.4 billion. But it backed off after the company disclosed a series of product defects and regulatory investigations.

Chen and another Cathay analyst, Eli Kammerman, predict J&J will counter with a cash-and-stock offer of $68 or $69 per share. They believe that will be close enough to Boston Scientific's offer to warrant serious consideration from Guidant's board.

In part, that's because J&J, with a market value of $179 billion, has the financial might to absorb the purchase more easily than does Boston Scientific, which has a market value of $21 billion.

If Boston Scientific buys Guidant, its market value will swell to $45 billion. But it also will have debt approaching half that figure, thanks to heavy borrowing to finance the deal, said Matthew Will, associate dean of the School of Business at the University of Indianapolis.

"A company that has 45 percent debt is not in a good position to create shareholder value," he said.

Guidant shareholders also would benefit sooner from a sale to J&J. Before the Boston Scientific bid, J&J was on track to close its deal in January or February. Boston Scientific says it can close quickly, too, but it would first have to secure anti-trust approvals, which J&J already has.

"There's a lot more uncertainty in terms of timing," Chen said.

Johnson & Johnson's broad product portfolio gives it another advantage, said Gene Tanner, vice chairman of NatCity Investments Inc. He sees stability in a lineup that stretches from Band-Aids to pharmaceuticals to heart stents.

Boston Scientific, on the other hand, focuses on medical devices.

Neither company's stock is having a stellar year. J&J shares are down 5 percent, while Boston Scientific's have plunged 27 percent-a slump its executives tried to cast in a positive light during a Dec. 5 conference call with analysts.

"We believe that the current Boston Scientific share price does not reflect the underlying value." Chief Financial Officer L aw r e n c e B e s t said. "Therefore, we believe the stock component of our proposal offers Guidant shareholders an opportunity for very significant upside potential."

I nve s t o r s w h o bought Guidant stock because they liked its focus on medical devices might consider Boston Scientific a better fit, said Thom Gunderson, an analyst with Minneapolis-based Piper Jaffray & Co.

"The next closest clone to that is not a gigantic global company that sells Tylenol and baby powder and, oh, by the way, hips and knees and stents as well," Gunderson said, referring to J&J.

Indiana University professor Ken Carow is skeptical J&J will up its bid enough to become competitive with Boston Scientific's, anyway.

"With that renegotiation, J&J has put themselves in a little bit of a corner," said Carow, an associate professor of finance at IU's Kelley School of Business in Indianapolis. "They've just gotten done arguing that Guidant's not worth $25 billion.

"Now, if [company officers increase] their deal, they're going to have to justify that to their stockholders."

Guidant shareholders have seen their own peaks and valleys as this drama plays out. Company shares reached $72 Oct. 17 before hitting a 52-week low Nov. 8 at $56.53.

They closed at $66.53 on Dec. 7.
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