Why the battle for troubled Guidant?
Whichever company controls the device maker becomes the 2nd biggest player in a lucrative business.
By Aaron Smith, CNNMoney.com staff writer


NEW YORK (CNNMoney.com) - Is Guidant worth all this fuss?

Johnson & Johnson and Boston Scientific Corp. are locked in a nasty takeover battle for Guidant Corp. (Research), an Indianapolis-based maker of implantable defibrillators and other medical devices that was hit with product recalls in 2005 that were connected to seven deaths.

Vying with Boston Scientific (down $0.09 to $13.61, Research), which develops implantable devices with treatments for deafness and pain: Johnson & Johnson (down $0.54 to $61.28, Research), the New Jersey-based maker of prescription drugs, Tylenol and other consumer products.

Boston Scientific raised its acquisition offer for Guidant to $80 a share Tuesday, bolstered by support from Abbott Laboratories (down $0.12 to $41.07, Research). Guidant's board of directors determined that Boston Scientific's $27 billion was superior to its current merger agreement with J&J, which has revamped its offer three times. Guidant on Jan. 14 accepted the latest offer from J&J, which came to $71 a share, or $24.2 billion. At that time, Boston Scientific had offered $24.8 billion. According to a news report, Guidant said earlier on Tuesday that it wants to stick with J&J, but also wants the consumer giant to raise its bid to $77 a share.

As part of the new bid, Abbott Labs on Tuesday said it agreed to buy $1.4 billion of Boston Scientific stock, or about 56 million shares, "contingent upon the closing of the Guidant acquisition." As part of the amended agreement, Abbott plans to pay Boston Scientific $4.1 billion to buy Guidant's vascular business if the merger goes through. This backing from Abbott gave Boston Scientific the strength to raise its bid.

J&J and Guidant agreed to merge back in December 2004 for $25.4 billion. But that was before Guidant started recalling a line of defibrillators and ran into trouble with regulators, prompting J&J to cut its offer.

Why all the hubbub?

Guidant's stock has been wildly volatile over the last 12 months, and is trading about where it was a year ago.

Last July Guidant recalled tens of thousands of pacemakers because of faulty sealants that allowed moisture to damage the devices' electronic circuitry. Of the 78,000 pacemakers that had been distributed, 28,000 had been implanted, including 18,000 in the this country, according to the Food and Drug Administration.

Then in December the FDA sent Guidant a warning letter stemming from its inspection of a pacemaker factory in St. Paul, Minn., three months earlier. The company replied that it had already addressed 90 percent of the problems cited in the letter.

Despite all these problems, whoever controls Guidant becomes the second-biggest player in the $10 billion industry for implantable pacemakers and defibrillators, said Keay Nakae, analyst for C.E. Unterberg, Towbin.

"The cardiac rhythm management business is large -- $10 billion, highly profitable and it's an oligopoly," said Nakae, in a Jan. 13 interview.

Medtronic (up $0.46 to $58.80, Research), currently No. 1 in the market, would remain the biggest, while St. Jude (up $0.30 to $53.83, Research) would come in at a close third, said Nakae.

Jan Wald, analyst for A.G. Edwards & Sons, on Jan. 13 described the cardiac rhythm device market as "one of the fastest growing markets in medical technology, and Guidant is number two in that market."

Guidant declined to comment for this story.

To read about other potential takeover targets for Johnson & Johnson, click hereTop of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.