Chapter 3

Case Study: Boston Scientific Overcomes Johnson & Johnson to Acquire Guidant: A Lesson in Bidding Strategies 1. What might J&J have done differently to avoid igniting a bidding war?

Answer: Immediately following its announcement that it had reached an agreement to be acquired by Johnson and Johnson (J&J), Guidant defibrillators became embroiled in a regulatory scandal over failure to inform doctors about rare malfunctions. This resulted in serious erosion in Guidants market value and prompted J&J to renegotiate down the purchase price. The renegotiated agreement gave Boston Scientific an opportunity to intervene with a more attractive bid. J&J could have avoided the subsequent bidding war by not having renegotiated the price.

2. What evidence is given that J&J may not have taken Boston Scientific as a serious bidder?

Answer: J&J announced publicly that Guidant was fully valued at its cash and stock bid of $76 per Guidant share. The firm refused to raise its bid to the higher Boston Scientific bid of $80, possibly believing that the already highly levered firm could not finance the bid. J&J had created a public relations nightmare for itself if it raised its bid, since that would upset J&J shareholders and make it look like an undisciplined bidder. J&J refused to up its offer saying that such a move would not be in the best interests of its

shareholders. J&J apparently had not anticipated the side deal that Guidant had made with Abbot Labs in which it agreed to acquire Guidants stent business, with Boston Scientific retaining the rights to use Guidant stent technology. The $6.4 billion received from Abbot Labs helped Boston Scientific pay the cash portion of the purchase price for Guidant and to reduce its leverage.

3. How did Boston Scientific finance the deal?

Answer: A side deal with Abbot Labs made the deal feasible for Boston Scientific. The firm entered into an agreement with Abbott Laboratories in which Boston Scientific would divest Guidants stent business, while retaining the rights to Guidants stent technology. In return, Boston Scientific received $6.4 billion in cash on the closing date, consisting of $4.1 billion for the divested assets, a loan of $900 million, and Abbots purchase of $1.4 billion of Boston Scientific stock. The additional cash helped fund the purchase price. Merrill Lynch and Bank of America are each lent $7 billion to fund a portion of the purchase price and to provide the combined firms with additional working capital.

4. How did Boston Scientifics financing strategy help the firm obtain regulatory approval for the transaction?

Answer: The willingness to sell Guidants stent business to Abbott Labs paved the way for regulatory approval by enabling Abbot Labs to become a competitor in the stent

business. Therefore, the regulatory authorities would be less concerned that one firm would have excessive market share and in turn be able to influence prices.

5. Explain how differing assumptions about market growth, potential synergies, and the size of the potential liability related to product recalls affected the bidding?

Answer: The potential product related liability initiated the bidding war as it provided Boston Scientific with an opportunity to intervene in what had been a signed agreement. J&J and Boston Scientific simply had different expectations for the growth of the defibrillator market and the potential synergies when integrated. Boston Scientific must have believed that the future growth would remain strong, the synergies would be greater if Guidant were integrated with it rather than J&J, and that future potential liabilities from federal investigation and lawsuits were manageable.