Guidant Takes J&J to Court

The medical-device maker sues to force the health-care giant to finish the merger.
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Updated from 10:45 a.m. EST

Guidant

(GDT)

apparently doesn't plan to let

Johnson & Johnson

(JNJ) - Get Report

get away without a fight.

The Indianapolis-based medical-device maker, hit by a number of product recalls this year, said Monday that it's filed a lawsuit in New York to compel a reluctant Johnson & Johnson to complete the companies' $25.4 billion merger.

The companies had been waiting for Federal Trade Commission clearance to seal the deal, but after receiving government approval last week, Johnson & Johnson was hardly doing cartwheels. The New Brunswick, N.J., health-care giant said not only were Guidant's short-term results and long-term outlook affected by its heart-device recalls, but the matter was damaging enough to free Johnson & Johnson from its obligation to close the deal according to the $76-a-share agreement.

Johnson & Johnson had been fairly quiet leading up to the final stage of regulatory approval of the merger. According to Guidant's lawsuit, within minutes of the FTC's go-ahead Johnson & Johnson said it wouldn't close the merger as it was structured.

As for the litigation, Johnson & Johnson said in a press release that it will "vigorously oppose the lawsuit and take all necessary action to enforce its rights under the merger agreement."

Guidant says Johnson & Johnson is legally obligated to complete the transaction and wants to back out "based on a meritless assertion that Guidant suffered a material adverse effect within the meaning of the merger agreement." Johnson & Johnson last week said the companies had discussed restructuring the deal, but the talks failed to result in an agreement.

The companies have entered a legal tug of war and dug in their heels, but "you can make strong cases for either avenue," said Stephen Brozak of WBB Securities in Westfield, N.J.

Brozak believes Johnson & Johnson has made its position clear, and the court fight isn't going to lend itself to a remedy Guidant will like.

"This is the least favorable position that Guidant would want to be put in," he added, saying it could take months or years to resolve the matter. "This is not going to have a soothing effect in the health-care industry," and could cause a dampening effect on investor confidence going forward, especially for large-cap stocks in the sector, he said.

Neither Brozak nor WBB Securities own shares of Johnson & Johnson or Guidant, and the firm doesn't have an investment banking relationship with either company.

Alex Arrow of Lazard Capital Markets wrote in a research report that Guidant's suit is "entirely consistent with hardball negotiating and does not change our view that the companies are likely to arrive at a compromise price and proceed with the transaction, contrary to market expectations."

At first, based on early merger negotiations in 2004, Guidant opted to continue as a stand-alone company rather than merging with Johnson & Johnson, according to the company's court documents. However, after further discussions in December, the companies agreed that $76 a share was a fair price to pay for Guidant.

Guidant said Johnson & Johnson "touted the long-term strategic rationale for the transaction." Namely, the deal would enable Johnson & Johnson to leap into the cardiac rhythm management market and benefit from Guidant's coronary stent technology.

Johnson & Johnson representatives didn't return calls for comment.

Stockholders were jittery Monday. Shares of Guidant, which says it's devoted much of its time and energy to the integration plans, fell $1.72, or 2.9%, to $57.20. Johnson & Johnson was down 35 cents, or 0.6%, at $61.23.

Guidant also reported its third-quarter results, posting sales of $795 million, a decline of $130 million, or 14%, from a year ago. The company had earnings from continuing operations of $65 million, or 20 cents a share, vs. $161 million, or 50 cents a share, in the prior year.

Excluding items, Guidant's third-quarter adjusted profit was $108 million, or 32 cents a share.

Guidant's latest results reflect the product recalls and sales suspensions of some of its devices. The company saw sequential growth in its U.S. coronary stent revenue and continuing sales gains from its emerging businesses.

In a filing with the

Securities and Exchange Commission

, Guidant said its fourth-quarter sales and pretax income from continuing operations are likely to be lower than the same period last year.