Fool.com: Guidant Buys CardioThoracic Systems (Breakfast News) August 31, 1999

BREAKFAST WITH THE FOOL

Tuesday, August 31, 1999

"The trees that are slow to grow bear the best fruit."
-- Molière

Guidant Buys CardioThoracic Systems

By Brian Graney (TMF Panic)

Medical devices maker Guidant (NYSE: GDT) has agreed to acquire coronary artery bypass grafting (CABG) products maker CardioThoracic Systems (Nasdaq: CTSI) for $313 million in stock. The purchase price works out to $19.50 per share, a 3% premium to CardioThoracic's closing price of $19 per share yesterday and not much higher than the shares' $18 initial public offering price in 1996 -- not the best example of building shareholder value in the world. The deal is expected to be neutral to earnings in 2000 and accretive in 2001. One-time acquisition-related charges will be recorded in Guidant's Q4, when the deal is expected to close.

CardioThoracic's access platforms and stabilizer systems for performing cardiac surgery on a beating heart will move Guidant into a new business area, where it will be butting heads once again with its traditional stent and defibrillator rival Medtronic (NYSE: MDT). According to analysts, CardioThoracic's share of the beating heart bypass market is roughly 60%, double Medtronic's share. Yet, the market share gains have not been reflected in a larger stock market valuation, mostly owing to the fact that the company's products are only slowly gaining acceptance with cardiologists and that the overall market opportunity remains small.

Currently, CardioThoracic estimates that only 17% of all CABG procedures are performed with a specialized beating heart platform. Meanwhile, the overall beating heart bypass market is growing, but from a very small base. Assuming CardioThoracic can keep its recent 16% quarterly sequential revenue growth going in the second half of this year, the company might hit $32 million in annual revenues. If that represents a 60% share of the market, as CardioThoracic says it does, then the size of the entire market is only $53 million. That's peanuts compared to the billions of dollars at stake annually in the stent market, which will continue to be Guidant's and Medtronic's main battlefield.

News to Go

Office supplies superstore operator Office Depot (NYSE: ODP) warned that weaker-than-expected sales and slumping margins will lead to second half earnings between $0.38 and $0.40 per share, missing the Street's estimates in the $0.50 to $0.52 per share range.

PC retailer CompUSA (NYSE: CPU) said it is reconfiguring its commercial sales force from a decentralized model to a more centralized, regional sales model. As a result, its commercial sales force will be cut in half to 1,800 workers. Most of the workers affected by the plan have been offered different positions in the revamped organization.

Los Angeles-based homebuilder Kaufman and Broad Home (NYSE: KBH) said it has discovered that an employee in its wholly owned mortgage banking subsidiary has been engaging in unauthorized mortgage loan trading activity. Apparently, the employee in question was not a very good trader, and as a result, Kaufman and Broad expects its third quarter earnings to be reduced by $0.24 per share. The First Call mean estimate had called for earnings of $0.93 per share.

Confirming days of speculation, Internet computing company Sun Microsystems (Nasdaq: SUNW) has bought privately held office software company Star Division Corp. and will roll out word processing, presentation graphics, spreadsheet, and other software tools in a package called StarPortal later this fall. In the meantime, Star Division's multi-platform compatible StarOffice desktop software can be downloaded for free at Sun's website.

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