Corporate marriages sometimes seem to go the way of human unions. There's the starry-eyed courtship, the proposal, and then all the backslapping and congratulations when the deal is announced. And, sometimes, one party gets cold feet and prepares the "let's just be friends" speech.
Such would seem to be the case in the now-troubled potential merger of health-care giant Johnson & Johnson (NYSE:JNJ) and large medical device maker Guidant (NYSE:GDT). In response to some product safety scandals and an ongoing withering of Guidant's market share in the hot ICD, or implantable pacemakers, market, J&J is now dropping very public hints that it may want to renegotiate the terms of the deal or possibly walk away entirely.
At issue is whether or not Guidant's recent problems constitute a material adverse change in the business. If they do, J&J could walk away from the deal. If not, J&J would have to look down the barrel of $700 million shotgun in the form of a breakup fee. As you might imagine, J&J thinks the ICD problem is pretty material, while Guidant does not. I tend to side with J&J on this one; Guidant management's comments on the matter seem to me to be akin to "pay no attention to the man behind the curtain."
As a J&J shareholder, I personally think that the company should either secure a lower price for the deal or walk away and take its chances in court. After all, spending $700 million to avoid overspending by billions seems the lesser of two evils.
What's more, I'm not sure that Guidant is really the company that J&J should want. St. Jude (NYSE:STJ) has a fast-growing franchise in ICDs and could also bring AdvancedNeuromodulationSystems (NASDAQ:ANSI) with it. Or J&J could use those resources to buy several smaller med-tech companies and/or biotech companies.
Because I'm quite happily not a lawyer, I have no expert opinion on who would most likely prevail in a court case, other than to observe that juries and judges have recently taken a somewhat harder line on what constitutes a material adverse change. Should the deal fall through, look for J&J to continue shopping and don't be surprised if Guidant attracts attention from Abbott Labs (NYSE:ABT) or Boston Scientific (NYSE:BSX). One way or another, it would seem that the game of musical chairs in med-tech is just beginning.
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Fool contributor Stephen Simpson owns shares of Johnson & Johnson.
