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BEHIND THE NEWS: A peek inside Guidant-J&J-Boston Scientific drama

December 19, 2005

Corporate attorneys aren't paid to write riveting prose. But the battle to buy Guidant Corp. is so drenched with drama that even the company's normally bonedry regulatory filings make compelling reading these days.

Here's one gem in a recent filing: Just hours after Guidant sued Johnson & Johnson the morning of Nov. 7-an in-yourface tactic aimed at forcing J&J to close on its $25.4 billion purchase of the Indianapolis company-Guidant CEO Ron Dollens phoned a top J&J executive in an attempt to rekindle discussions on a compromise.

That call led to a whirlwind week of negotiations, culminating with the Nov. 14 announcement that New Jersey-based J&J would buy Guidant for $21.5 billion-a reduction of more than $3 billion from the price J&J agreed to when it announced the merger in December 2004.

But any good corporate takeover battle needs a rival suitor, and for Guidant it's Massachusetts-based Boston Scientific. The scrappy manufacturer of heart stents is giddy over Guidant's defibrillator business, which was growing explosively before the company disclosed a series of product defects and regulatory investigations this summer and fall.

On Nov. 1, as Guidant and J&J were deep in talks to save their merger, Guidant Chairman James Cornelius received an out-of-the-blue call from Boston Scientific wanting to schedule a meeting to discuss a possible merger.

Even for Cornelius, 62, a seasoned corporate executive who spent more than a decade as Eli Lilly and Co.'s chief financial officer, the call must have come as a jolt.

After huddling with Guidant's legal advisers, Cornelius the next day told the Boston Scientific representative that "in light of the ... merger agreement with Johnson & Johnson, he could not attend such a meeting," a filing says. As required under that agreement, he then notified J&J of Boston Scientific's overture.

Even though Guidant and Boston Scientific didn't open talks at that point, knowing Boston Scientific was in the wings must have given pause to top executives of J&J, who had spent weeks trying to make the case the Indianapolis company now was worth billions of dollars less than they had agreed to pay.

They'd made their most aggressive move on Oct. 18. After first warning Guidant the bombshell was coming, J&J told analysts for the first time the deal was in doubt.

"As it relates to the previously announced product recalls at Guidant and the related regulatory investigations and other developments, we believe that these are serious matters," Vice Chairman Robert Daretta said on a conference call. "In light of these matters and their impact, we are continuing to consider the alternatives under our merger agreement."

In response to the statement, Guidant shares tumbled $8.28 in a matter of hours, an 11-percent drop that wiped out $2.7 billion of the company's market value.

Boston Scientific executives don't see Guidant's problems as so dire. On Dec. 5, the day they went public with a $25 billion bid for the company, Boston Scientific Chief Operating Officer Paul LaViolette told analysts: "The legal issues, the regulatory issues are things we have done a very thorough review of, obviously based on public information. ... We think we understand them, and we believe they are manageable."

The chronology in the regulatory filing stops on Dec. 5, the day it was filed with the Securities and Exchange Commission. But the drama continues to unfold. Guidant on Dec. 7 announced it was entering talks with Boston Scientific. The big question now: Will J&J eat crow and up its offer?

Marsh loses merger veteran

Marsh Supermarkets Inc. had a merger veteran at the helm. Now, he's gone.

John Elbin, who quit as Marsh Supermarkets' chief financial officer Dec. 7, held that post with Indianapolis-based industrial-coatings maker Lilly Industries when it was bought for $1 billion in 2000 and with St. Louis-based food-maker Pet Inc. when it was bought for $2.6 billion in 1995.

At both companies, he collected big severance payments on his way out the door. Those payments topped $1.1 million at Pet and $1.3 million at Lilly Industries.

Elbin, 52, who joined Marsh just four months ago, declined to comment. In a statement, Marsh said he quit "because he disagreed with other members of senior management on actions" to improve the company's performance.

He's not the first Marsh CFO to quit after a clash. In 1993, Paul Freischlag, then 39, stepped down from the post just three months after joining the company. At the time, a company spokesman attributed his exit to a "personality difference."
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