Updated from 10:36 a.m. EST

Johnson & Johnson

(JNJ) - Get Report

says it will acquire medical-device maker

Guidant

(GDT)

for $23.9 billion in cash and stock.

The deal, approved by both boards, still must be approved by U.S. and European regulators as well as by Guidant's shareholders. The acquisition is one of the largest of the year, and it caps a busy period that has seen several major corporate hookups. It also changes the competitive landscape in the medical device field, especially in the area of cardiac rhythm management.

Under the agreement, Guidant common stock will be exchanged for $30.40 in cash and $45.60 in Johnson & Johnson common stock, so long as the average J&J price is between $55.45 and $67.09 during the 15-day trading period ending three days prior to the transaction closing. The deal, the subject of months of negotiations and rumors, was announced late Wednesday night.

When asked by an analyst Thursday about future deal-making, Robert J. Darretta, J&J's chief financial officer, said the transaction was structured so it wouldn't dissuade J&J from "being active in other areas." He didn't provide details on possible future deals.

J&J has perhaps the strongest balance sheet among Big Pharma companies, and it enjoys top ratings from credit rating firms.

Standard & Poor's on Thursday reaffirmed its 'AAA' long-term credit and 'A-1+' commercial paper ratings. The ratings outlook is stable. "The premier ratings ... reflect the diversified and highly profitable health care firm's internal generation of funds, which is well in excess of ongoing spending needs," said S&P credit analyst David Lugg.

Darretta outlined the potential financial impact of the transaction. Noting that the predeal consensus view of analysts is for $3.34 in earnings per share in 2005 for J&J, Darretta said he is "comfortable" with that figure for the merged company if the transaction takes effect July 1. He emphasized that the figure excludes noncash charges, which could be about $9 billion and which would be amortized over 12 years. The Thomson First Call consensus EPS for 2004 is $3.07.

By 2006, Darretta said, the combined medical device businesses of Guidant and J&J would account for about 40% of revenue for the merged company. Prescription drugs would represent about 40% of sales, and consumer products would account for 20%.

Right now, medical devices account for about 36% of J&J's sales, prescription drugs account for 47%, and 17% come from consumer products.

Adding Guidant also will add balance to J&J's operating profit picture. At the end of 2001, Darretta said, prescription drugs accounted for about two-thirds of operating profits, with devices and consumer products making up the rest. By 2006, prescription drugs will account for "slightly more" than half of operating profits.

Darretta added that J&J wasn't seeking to de-emphasize its prescription drug business. "We are interested in building a better balance in our

total business," he said.

Favorable Reaction

Shares of J&J rose $1.92, or 3.2%, to $62.82 on Thursday, creating a new 52-week high. Guidant, whose shares have been rising since late November on rumors of an impending deal, slipped 7 cents to $71.97, or about $3 off its 52-week high.

"We like this deal," said Tao Levy, of Deutsche Bank Securities, in a brief research note on Thursday that accompanied the raising of J&J's rating to buy from hold. The acquisition "eases our concerns over J&J's near-term growth profile, said Levy, who raised the 12-month stock price target to $70 from $62. (Levy doesn't own shares; Deutsche Bank says it "does and seeks to do business" with companies mentioned in research reports).

"We think this is a terrific deal for J&J, strategically and financially," added Robert Faulkner of Prudential Equity Group, in a Thursday report to clients.

The acquisition's structure -- especially integrating Guidant with J&J's Cordis medical device unit -- "is typical of J&J, buying an organization that can help them accomplish goals much longer-term in nature than typically forecasted financials," said Faulkner. He has an overweight rating on J&J.

Analysts view Guidant as a more effective operation than Cordis, and Faulkner said he hopes the proposed realignment will enable J&J to keep Guidant's managers. (He doesn't own shares; his firm doesn't have an investment banking relationship).

Buying Guidant gives Johnson & Johnson access to products such as pacemakers and the fast-growing implantable cardioverter defibrillators, or ICDs, which deliver electrical shocks to slow down dangerously rapid heartbeats. Analysts say the ICD-product acquisition is the key to the deal.

The acquisition also provides an addition to J&J's own line of drug-coated arterial stents, which prop open blood vessels that have been cleared of dangerous plaque.

Some Questions

The long-awaited deal could face some antitrust issues, especially involving the drug-coated stents. J&J already markets the Cypher drug-coated stent, and earlier this year J&J signed a deal with Guidant enabling the Indianapolis company to co-market Cypher.

However, J&J officials said Thursday that they believe the Federal Trade Commission will approve the deal because the companies' various businesses are "very complementary." Darretta said he doubted there would be any "material" divestitures required to complete the deal.

Guidant is the market leader in the rapidly shrinking "bare metal" coronary stent market. It is working on two versions of drug-coated stents, which release a chemical periodically into blood vessels to reduce the risk of arteries reclogging. Drug-coated stents do a better job of reducing this risk than do metal stents. But Guidant is still about two years away from marketing its drug-coated stents, according to Wall Street estimates.

Combining Guidant's and J&J's stent efforts will put greater pressure on

Boston Scientific

(BSX) - Get Report

, which now leads the drug-coated stent market with its Taxus product.

Medtronic

(MDT) - Get Report

and

Abbott Laboratories

(ABT) - Get Report

also are developing drug-coated stents.

The acquisition should provide additional financial support for Guidant's development of ICDs. Medtronic is the ICD market leader, followed by Guidant and

St. Jude Medical

(STJ)

.

Guidant and J&J's Cordis division will become part of a newly created cardiovascular device unit within J&J. The newly created franchise will be named Guidant, while the Cordis name will be retained for select businesses within the franchise.

"The combination of these businesses will enable us to bring innovative new therapies to patients and their physicians in this very important and fast-growing therapeutic area," said William C. Weldon, chairman and CEO of J&J.

Ronald W. Dollens, Guidant's CEO, added: "This exciting new partnership opens a dynamic era of innovation and product development that will benefit millions of patients around the world. ... We strongly believe that this exciting collaboration will benefit patients, customers, employees and shareholders." Dollens noted that over the last four years, 50% of Guidant's sales have come from products that are less than 12 months old.

Dollens has agreed to continue to serve as CEO of Guidant until the transaction has closed.

It was Dollens' announcement in May that he would retire by year-end, plus the lack of comment from Guidant about a replacement, that helped trigger Wall Street's speculation that Guidant was talking to J&J about a deal. J&J is the rare Big Pharma company that has combined prescription drugs, consumer products and medical devices to create a diverse portfolio of products.

Over the years, many Big Pharma companies have sold or spun off their device businesses and other nondrug assets. Guidant, for example, was spun off as an independent company by

Eli Lilly

(LLY) - Get Report

10 years ago.

The companies said the cardiovascular device business "continues to be one of the fastest-growing areas in health care" as populations age. "As a combined entity, Guidant and Cordis will more effectively bring technologically based and innovative approaches to the treatment of cardiovascular diseases," the companies said.