Monday, January 30, 2006

Maybe, Just Maybe, J&J Was Right All Along

Having examined a Guidant deal three years ago and passed, the company [Boston Scientific] became intrigued at possibly taking advantage of a lower J&J bid.

“J&J opened the door to us, and we’re gutsy enough to walk in,” said one Boston Scientific executive.—Wall Street Journal

Thus the Journal reported how it was that Boston Scientific sprung its surprise $25 billion bid for Guidant just a few weeks after Johnson & Johnson had negotiated a price cut with the regulatory-entangled Guidant.

Wall Street loves a good bidding war, of course—what with the duplicate advisory fees, duplicate legal fees, duplicate financing fees, and, in the end, the higher share price upon which so many other sharks in the tank can feed.

But will Boston Scientific shareholders benefit from the company’s self-proclaimed “gutsy” move?

Consider that J&J had agreed to buy Guidant in December 2004. Think about the number of J&J lawyers, finance people, doctors and consultants combing through Guidant, evaluating the business units product-by-product, working out the details of the merger and how the post-merged company would function.

Consider the fact that the deal had to be approved by our Federal Trade Commission as well as the European Union, and think about how many individuals from both companies had to work together to convince hundreds of regulators around the world to approve the deal.

Ask yourself how much J&J was spending on the deal—a million bucks a day? Two million a day?

And consider the detailed due diligence J&J had thereby acquired on every aspect of Guidant during that entire process

Now, recall that six months after the deal was announced, Guidant reported a flaw in one of its defibrillators, and soon pulled five of the devices from the very market for which J&J wanted Guidant in the first place.

And recall that J&J felt compelled to issue a press release describing these product issues as “serious matters,” but said it was working with Guidant to resolve the issue.

Then think about why it was that J&J eventually lowered its deal price for Guidant—the very act which “opened the door” for Boston Scientific to swoop in with its dramatic, 11th Hour offer and ultimately prevail with the kind of high drama and stretched bid that Wall Street loves and for which it has been cheering on the BSX crew.

And ask yourself who really knows more about Guidant and what it will take to restore its franchise and take advantage of the medical and demographic trends upon which the premise of the deal itself rests?

Is it the folks at J&J who, metaphorically speaking, spent over a year roaming the House of Guidant, peering in the attic, ripping up floorboards, checking the plumbing and inspecting the roof?

Or is it the outsiders at Boston Scientific, who drove by a house they had thought of buying three years ago, before the price tripled, but had passed on it—and now, admiring anew what they saw, found a friendly set of bankers and started bidding?

“Gutsy” may be the right adjective for the bid-‘em-up folks at Boston Scientific—they’ve proved themselves full of that quality in years past.

Time will prove whether “stupid,” “desperate,” “naive” or, perhaps, “brilliant” are better.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


BDG123 said...

Got a good friend who works for the leader in this field. Company unnamed. Supposedly, Guidant had a rough time for a while but has since recovered in the market quite nicely and is winning business again.

The biggest problem in my estimation is how the issue was handled from day one. Obviously, they did not seek counsel from a crisis management firm. Major screw ups everywhere. It made them look like they were hiding something.

Guidant has a strong brand with the docs and if they can get this under control once and for all, they will dovetail quite nicely into BSX's forays into implantable devices. This is not just about cardiac rhythm management but also about implantable devices for a multitude of brain disorders, pain management, etc. The body is one big circuit and the scientific community is finally figuring out how to treat certain issues with implantable devices.

Was $25B too much? That's one hell of alot of money. But the margins in this business are stupid and the barriers to entry are great.

AA said...

Regarding margins, if I remember correctly, they are close to 80%.

Nissan said...

A company with the #2 stent, which will see massive growth deceleration, buys the #2 ICD developer who has a, arguably, flawed product. They bid up for it, sold the deal to investors on the basis of synergies and now must integrate a company that is larger than their own. Sounds like a great idea...

BelowTheCrowd said...

The reality of such deals has not changed over the years. Most of these large-cap mergers designed to create "synergies" end up destroying capital for the acquirer.

They do, however, provide a great regular stream for the bankers, who will show up to help in a few years when the next CEO decides to "unlock value" through a spinoff or breakup.

Seen it way too many times, and we all should have figured out the game by now.


Aaron Koral said...

You know, I wonder whether STJ may be in JNJ's "sights", now that GDT is being snapped up by BSX. IMHO, I think JNJ not getting GDT may turn out to be a "blessing in disguise" earnings-wise for JNJ. STJ is in the same businesses (i.e., stents, heart valves and pacemakers) as GDT, and yet, IMHO, STJ has better cash flow and revenue growth than GDT...I wonder where that leaves STJ? I could be wrong, though.