After a couple weeks of teeth-gnashing, throaty growls, and saber-rattling, Johnson &Johnson (NYSE: JNJ ) and Guidant (NYSE: GDT ) ended up taking the obvious route to resolve their disputes: They sat down and talked. The two companies hammered out a revised merger agreement that continues J&J's buyout of Guidant, but at a lower price.
The two companies announced Tuesday morning that they will proceed with the merger at a newly revised net price of $19 billion, valuing Guidant at about $63 per share. Compared with the earlier agreement (which preceded Guidant's very public problems with its ICD business), J&J will be paying about 17% less per share for the business. All told, Guidant shareholders will get $33.25 per share in cash and 0.493 shares of J&J if they approve the deal.
For about $19 billion net, J&J is paying a bit more than five times estimated sales for 2005. Yes, that's less than the valuation on St. Jude (NYSE: STJ ) and Medtronic (NYSE: MDT ) , but Guidant isn't as strong as those two at the moment. What's more, given that big-cap med-tech companies often trade between three and six times revenue, that's not an unreasonable price on the whole.
So what does this mean for the med-tech space, assuming that this deal actually goes through? It will make J&J more dependent on medical devices than pharmaceuticals or consumer health. Given the recent performance of J&J's pharmaceuticals division, that's not a bad thing. What's more, while Guidant is currently in a tough spot with its cardiac rhythm management business, they have good technology, which J&J will ultimately be able to exploit in the marketplace.
The deal could also start a round of musical chairs, as companies seek acquisitions to shore up weak spots or add growth. In that regard, BostonScientific (NYSE: BSX ) could make for an interesting target, while Abbott Labs (NYSE: ABT ) might be an acquirer. Other potential targets could include Steris (NYSE: STE ) , Biomet, or CYTYC -- but there's often more talk about these sorts of deals than actual deals.
As a J&J shareholder, I'm OK with this deal. Although fixing Guidant's problems will take some time and money, I believe that the company will ultimately be stronger for it. I'd like to see J&J do more to shore up its pharmaceutical business, but you can't have everything you'd like all at once.
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Fool contributor Stephen Simpson owns shares of J&J. The Fool has a disclosure policy.
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