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Who's the next target for a J&J buyout?
If the J&J backs out of its Guidant merger, other takeover targets abound.
November 4, 2005: 4:10 PM EST
By Aaron Smith, CNN/Money staff writer

NEW YORK (CNN/Money) - So who's next in line for a Johnson & Johnson buy-out?

Johnson & Johnson (down $0.20 to $61.00, Research), a giant with multiple product lines that feeds its growth through acquisitions, is having second thoughts about Guidant (up $1.55 to $59.12, Research), a producer of implantable defibrillators and other medical devices that J&J had slated for takeover.

The two companies agreed to merge back in December, 2004. But that was before Guidant had to start recalling one of its main defibrillator product lines. Now Johnson & Johnson appears to be rethinking the $24.5 billion acquisition, even though it just won the go-ahead from the federal government. Johnson & Johnson on Wednesday referred to Guidant's product recalls and regulatory investigations as "serious matters affecting both Guidant's short-term results and long-term outlook" and was considering a "restructuring of the terms of the transaction."

Brunswick, N.J.-based J&J produces drugs, medical devices and consumer products ranging from dental floss to foot cream, totaling $47.3 billion in 2004 sales. There's no shortage of potential acquisitions if Johnson & Johnson bows out of the Guidant deal, analysts say, but the benefits they would bring are questionable.

"There's nothing too expensive for Johnson & Johnson," said Robert Goldman, analyst for Keybanc Capital Markets. "They can buy anything they choose to buy in the medical products arena. But whether it's a good move for shareholders is another question."

"Johnson & Johnson is really in a tough spot," said John Putnam, analyst for Stanford Financial. "The big challenge is finding something large enough and paying a reasonable price for it, to have it contribute to its growth rate."

So what are the best picks? Here are a few choices:

St. Jude Medical

St. Jude Medical (down $0.55 to $49.47, Research), a producer of implantable defibrillators and other medical devices, could very well be the next best choice, though it would be more expensive than Guidant.

"The most obvious one is St. Jude, if [J&J] wants to be in the implantable defibrillator or pacemaker market," said Putnam of Stanford Financial. "It's probably a better play [than Guidant] because they have better technology and they're gaining market share instead of Guidant losing market share."

Based in St. Paul, Minn., St. Jude reported $2.3 billion in 2004 sales, with market capitalization of $18.2 billion and a price/earnings ratio of 34. The company's stock price has jumped by nearly a third over the past 12 months.

But Putnam also noted that St. Jude has a higher price/earnings multiple than Guidant's ratio of 32. "Probably they'd have to pay more than they want," said Putnam.

Medtronic

Actually, this may be the one company that is too expensive for J&J. Medtronic (up $0.01 to $56.12, Research), the Minneapolis-based maker of medical devices for the treatment of diabetes and heart and spinal conditions, has a market capitalization of $68 billion and may be too massive for takeover.

Robert Faulkner, analyst for JMP Securities, said that a J&J takeover of Medtronic would be like "the right whale swallowing the orca. It would be half of Johnson & Johnson's market cap."

The company reported $2.7 billion in 2004 sales and has a price/earnings ratio of 42. Medtronic's volatile stock price has made modest gains over the last 12 months.

"Medtronic would probably be, even for Johnson & Johnson, too big of a bite," said Goldman of Keybanc Capital Markets.

Stryker Corp.

Stryker Corp. (up $0.29 to $43.06, Research), a maker of spine implants and devices for hip and knee replacement and trauma surgery based in Kalamazoo, Mich., could also be a promising acquisition. Stryker reported $4.3 billion in 2004 sales, with a $17.4 billion market capitalization and a price-earnings ratio of 31. The company's stock has fluctuated wildly over the last 12 months, but is currently trading at a similar level to where it was last year.

"This is a company and a stock that is really attractive," said Putnam of Stanford Financial. "Their product lines are very, very similar so whatever market share that Johnson & Johnson would garner by acquiring Stryker would be a dominant market share."

Guidant

Based in Indianapolis, Guidant has a market capitalization of $19.3 billion and reported 2004 sales of $3.7 billion. Goldman of Keybanc Capital Markets said he does not expect the merger to go through and that's a good thing for stockholders, especially considered that Guidant suffered a recent stock price decline.

"I believe shareholders of both companies would be better suited with each company as a standalone," said Goldman.

Boston Scientific

Boston Scientific (down $0.04 to $25.58, Research), a developer of implantable neurostimulation devices with treatments for deafness and pain, could be an affordable and opportunistic buy if the feds ignore the specter of a monopoly and let it happen. Based in Natick, Mass., the company reported $5.6 billion in 2004 sales, with market capitalization of $20.9 billion and a price/earnings ratio of 16. The company's stock price has lost nearly a third of its value over the last 12 months.

"Boston Scientific would be an interesting acquisition for them but it probably wouldn't pass the Federal Trade Commission because of the stent business," said Putnam of Stanford Financial. "The two of them [J&J and Boston Scientific] would probably control the entire stent business."

To read more about the Johnson & Johnson and Guidant deal, click here.  Top of page


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