Updated from 5:09 p.m. EST
board has declared that
offer Tuesday to buy the company for $27 billion, or $80 a share, is superior to the latest proposal from
Johnson & Johnson
Boston Scientific's increased cash-and-stock bid follows a sweetened offer for Guidant from Johnson & Johnson last Friday that's worth $24 billion, or $71 a share.
The decision by Guidant's board is the first time it has said Boston Scientific was offering the better deal. Guidant already has signed a merger agreement with Johnson & Johnson, and its shareholders are scheduled to vote on that pact Jan. 31.
Under the terms of its arrangement with Johnson & Johnson, Guidant has to wait five business days, or until Jan. 25, before it can change its recommendation on the Johnson & Johnson merger or terminate the transaction. Boston Scientific's offer will remain open until 4 p.m. that day.
"We are pleased with Guidant's response, and we look forward to working together to complete the transaction," Boston Scientific said in a press release.
Johnson & Johnson issued its own statement, saying it "considers the proposal from Boston Scientific to be a highly dilutive and leveraged transaction based on extremely aggressive business projections and, as such, one that will not provide $80 per share in value to Guidant shareholders." Johnson & Johnson also said it will consider its alternatives under the existing merger agreement with Guidant.
The latest Boston Scientific pitch -- its third since Dec. 5 -- comprises $42 a share in cash and $38 in common stock. Boston Scientific's previous offer was valued at $26 billion, or $73 a share. The new proposal includes an enhanced agreement with
related to the divestiture of overlapping assets and an improved collar designed to preserve the value of the stock portion of the bid.
Abbott, the Illinois-based drug and device conglomerate, also agreed to buy 56 million Boston Scientific shares for about $1.4 billion in the event a Guidant transaction closes. Such a purchase would give Abbott a 4% stake in Boston. Abbott also agreed to a higher price for Guidant's vascular intervention and endovascular businesses, saying it will make an upfront payment of $4.1 billion for the operations, up from $3.8 billion. In addition, Abbott will lend Boston Scientific $900 million.
The origins of the Guidant drama date back to December 2004, when Johnson & Johnson agreed to buy the company for $76 a share. But after Guidant recalled tens of thousands of heart devices last year, Johnson & Johnson said the company was no longer worth the original price. The deal almost fell apart, but the sides worked out an arrangement valued at a little more than $63. Then the bidding war began, with Boston initially proposing to pay $72 a share for Guidant.
Boston Scientific had given Guidant until 5 p.m. to declare its bid superior to Johnson & Johnson's. Boston Scientific included a similar provision in a $73-a-share offer made Thursday. Guidant eventually recommended that its shareholders accept Johnson & Johnson's sweetened $71-a-share offer.
Antitrust concerns and the length of time it might take to wrap up the Boston Scientific merger may have been contributing factors in Guidant's past willingness to take a lower price from Johnson & Johnson.
"Our $80 per share offer for Guidant is compelling," Boston Scientific said earlier Tuesday. "We are providing Guidant shareholders with certainty of completion, significant upside potential and substantially more value today than the Johnson & Johnson transaction. By any objective measure, our offer is clearly superior to Johnson & Johnson's."
However, in sparring with Johnson & Johnson for Guidant's heart, Boston Scientific may have gone too far, according to analyst John Putnam of Stanford Financial Group.
"I think that they're paying far too much, and I don't think the dilution is warranted," he says. "They're possibly putting their company in jeopardy and bumping up against a change in their credit rating."
Boston Scientific's shares sank $1.30, or 5.2%, to $23.90 at the close of regular trading. Guidant's shares rose $5.38, or 7.6%, to $76.22, and Johnson & Johnson lost 54 cents to $61.28.
Johnson & Johnson, with dozens of brands and operating companies under its massive umbrella, wouldn't be as hard hit as Boston by earnings dilution, Putnam says. Boston Scientific has said it doesn't anticipate the deal adding to its profits until 2009.
While Putnam believes Guidant would represent less than 10% of Johnson & Johnson's revenue and earnings three or four years out, he says it would be a more influential part of Boston Scientific.
"If you were Guidant, you would think Boston Scientific is more rational," Putnam says. "The fit is greater, and there would be more leverage" in terms of how the business would run after an acquisition.
Prior to Boston Scientific's latest bid, Guidant had indicated it would side with Johnson & Johnson, even though the New Jersey health-care giant has been consistently trailing Boston's per-share terms. According to Steve Brozak of WBB Securities, Johnson & Johnson now has no choice but to at least match its first proposal of $76 a share made in December 2004.
"They already look silly," Brozak says. "Now it's a question of putting their business needs over their pride. They've invested too much time in this effort to not exceed it now."
Analyst John Chen of Cathay Financial believes Johnson & Johnson has to offer at least $77 to remain in the running, but the company seems more financially disciplined than that, he says.
At this point, he says, Johnson & Johnson acquiring
St. Jude Medical
might be a better deal and a better way to break into the market for pacemakers and defibrillators. St. Jude, whose name surfaces from time to time as a possible takeover candidate, saw its shares trade up 0.6% to $53.83.
Chen, Cathay's mergers and acquisitions analyst, isn't convinced another counteroffer is coming, but Brozak expects J&J to improve its terms yet again. "They've got a lot of time and effort invested, and to come up empty-handed would not bode well for them," he says.