Johnson & Johnson $25.4bn takeover of Guidant in doubt as Guidant faces
6 November 2005.
Only days after the Federal Trade Commission (FTC) conditionally approved
the Johnson & Johnson $25.4bn acquisition of Guidant Corporation, it seems
the deal may be in doubt.
Guidant entered into the takeover deal with Johnson & Johnson in December
2004, but on 2nd November, shortly before the takeover was due to be sealed,
New York Attorney General Eliot Spitzer filed a lawsuit against Guidant in
the New York State Supreme Court in Manhattan. The lawsuit alleges that
Indianapolis-based Guidant Corporation engaged in fraud by failing to
disclose to physicians information about a flaw in its implantable cardio
defibrillator — the Ventak Prizm 2 DR Model 1861.
"Concealment of negative facts that might influence a consumer to
purchase another manufacturer’s product is the essence of fraud," Spitzer
said. "We wouldn’t permit this type of conduct in connection with the sale
of cars or washing machines. It is simply unconscionable that it occurred
with a critical medical device."
The US Food and Drug Administration (FDA) issued a nationwide recall
notification on June 17, 2005 for Guidant's implantable defibrillators and
cardiac resynchronization therapy defibrillators, and on July 18, 2005
Guidant warned physicians and patients to seek replacement of at least nine
different cardiac pacemaker models and product lines.
On 18 October, Johnson & Johnson representatives revealed to the
investment community that it was seeking alternatives to the merger deal in
earnest, as a direct result of the "developments" at Guidant.
Last week, on 2nd November, Johnson & Johnson released a statement
announcing the FTC conditional clearance of the takeover, but added:
"Johnson & Johnson 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.
"Johnson & Johnson has had discussions with Guidant regarding a
restructuring of the terms of the transaction, although those discussions
have not resulted in any agreement between the companies. Johnson & Johnson
cannot assure that the companies will resume those discussions or, if
discussions do resume, whether they will be able to reach agreement on
revised terms that would allow Johnson & Johnson to proceed with the
Guidant, however, issued a statement on 2 November that it had informed
Johnson & Johnson that the parties remained legally obligated to complete
their transaction in accordance with the Merger Agreement.
On Thursday, Guidant was hit by another lawsuit. Scott + Scott, LLC filed
a securities fraud class action in the United States District Court for the
Southern District of Indiana. It alleges that "Guidant and certain of its
officers and directors violated provisions of the Securities Exchange Act of
1934, causing the company's stock price to become artificially inflated".
The Salt Lake Tribune has reported that the family of Charles Edge who
died in 2003 after his pacemaker repeatedly failed, is also suing the
company. The company is also facing 136 class-action suits, including an
action brought by its own employees.
The Guidant share price has dropped from around $70, which it has held
for several months to $58.9 on Friday 4th November, falling to as low as
$57.05 in heavy trading.
By the Friday deadline for closure of the merger there was no news of
agreement. With the original deal valuing Guidant at $76 per share, it
appears that Johnson & Johnson is looking for a reduced valuation. Guidant,
however, is reported as saying that the product recall will only have a
short-term affect on the company.
New York State Supreme Court press release
US Federal Trade Commission press release
Scott + Scott, LLC press release
Johnson & Johnson