Johnson & Johnson $25.4bn takeover of Guidant in doubt as Guidant faces lawsuits

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 transaction."

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

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