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Updated from 9:43 a.m. EST

Johnson & Johnson

(JNJ) - Get Free Report




are back at the altar.

After saying it wanted out of its $25.4 billion takeover bid following a series of regulatory setbacks, J&J agreed Tuesday to acquire the medical device maker for about $21.5 billion, or $19 billion net of Guidant's cash. The new bid will pay Guidant shareholders $63.08 in cash and stock, down 17% from the old offer of $76 a share.

"The board believes that it is in the best interest of shareholders to proceed with the merger agreement at the revised terms," Guidant said. "Our enthusiasm for this merger and its potential continues. This agreement makes sense for Guidant shareholders and its employees."

Guidant, whose stock plunged from the low $70s after the first agreement fell apart, rose 8.2% to $62.50. J&J gained 3.8% to $62.83 as the market rendered a positive verdict on the value being transferred under the new price.

The new deal, which comes out to $33.25 in cash and 0.493 of a J&J share, was approved by both companies' boards. Guidant shareholders must still approve it before its expected close in the first quarter of 2006.

Tuesday's news should end the year's most contentious merger saga, one that has repeatedly confounded shareholders on both sides, led to a last-ditch lawsuit and infuriated a vocal community of merger arbitrage hedge funds.

"We are delighted that our companies have reached an accord," J&J said. "Our agreement demonstrates that we remain committed to the goal of together building an extraordinary cardiovascular business that can deliver better medical options sooner to millions of patients."

Assuming the deal closes on Jan. 1, J&J CEO Robert Darretta expects the company's 2006 earnings to be cut by 8 cents to 11 cents, excluding noncash charges. He says the deal should be modestly dilutive to 2007 earnings but add strongly to profits thereafter.

"J&J is looking to ensure that they've got the ability to increase their growth quarter to quarter," according to Steve Brozak of WBB Securities. "Their further expansion into the medical devices market provides them with that," he says. Brozak and WBB don't own J&J or Guidant shares.

Darretta expects the Guidant acquisition to add 3% to J&J's average annual growth rate in 2006 through 2008.

Regulators cleared J&J, based in New Brunswick, N.J., to acquire Guidant on Nov. 2, but the transaction has been in question ever since Guidant was hit in recent months by a series of recalls of its pacemakers and implanted defibrillators.

After J&J said last month it would "consider alternatives" under its agreement, Guidant's shares fell amid speculation that the acquisition plans would be canceled. Guidant later

sued J&J to keep it at the bargaining table. According to J&J, the suit has been dismissed.

The 17% haircut in J&J's offer reflects its estimate of the damage to Guidant's enterprise value in the wake of its much-publicized product headaches. In announcing it was considering alternatives to the deal earlier this month, J&J said it "continues to view the previously announced product recalls at Guidant and the related regulatory investigations, claims and other developments as serious matters affecting both Guidant's short-term results and long-term outlook.

"Johnson & Johnson believes that these events have had a material adverse effect on Guidant, and, as a result, that it is not required under the terms of the merger agreement to close the Guidant acquisition," the company said.

Simultaneously with the merger agreement, Guidant announced the departure of CEO Ronald Dollens, who postponed his initial retirement plans to advise on the deal. Chairman James Cornelius has taken over as CEO in the interim.

At least one analyst suggests that former Dollens was a vocal opponent to Guidant accepting a lower acquisition bid.

"If he was the stumbling block in getting this deal done, he got pushed aside so the deal could get done," says John Putnam, an analyst at Stanford Financial, in an interview. Stanford Financial doesn't hold shares in either company.

"Over the past year, I have become more convinced than ever that this is a strategic opportunity that will propel our companies for leadership in the cardiovascular space in a way that neither company could've achieved independently," Cornelius said during a joint conference call with J&J.

He added that the agreement "appropriately reflects the business challenges we have experienced during this period."