Medical device investors felt their hearts skip a beat yesterday as news reports swirled that Johnson & Johnson (NYSE:JNJ) was moving forward with discussions to buy Guidant (NYSE:GDT). Credit for breaking the story, incidentally, goes to Andrew Ross Sorkin and Barnaby J. Feder of The New York Times, along with the unnamed "executives close to the talks" who saw fit to float this "trial balloon" on the market.
It appears the experimental treatment worked. Johnson & Johnson's shares fell -- as acquiring companies' stocks usually will when deals are announced, though of course this one hasn't been yet -- but recovered somewhat during the day, ending down a hair more than 2% on heavy volume. Guidant's, meanwhile, hopped more than 5% on volume, nearly eight times its recent average, as investors looked to get on board before the buyout.
It's not difficult to understand why the market reacted strongly to the reports. The deal, based on reports valuing it at approximately $24 billion, would be among the year's largest and would represent about a 9% premium to the company's market value as of Monday's market close. As Johnson & Johnson generated roughly $8.5 billion in free cash flow through September -- it has some $13 billion in cash and marketable securities on the balance sheet, more than four times its long-term debt load -- it's certainly doable.
Still, why splash out all that dough? Because it would be a massive, if not entirely risk-free, broadside aimed squarely at key competitors Boston Scientific (NYSE:BSX) and Medtronic (NYSE:MDT), who are fighting with the aforementioned business partners for the massive and growing stent business among other product categories. (Medtronic partners with Abbott Laboratories (NYSE:ABT) in the stent business.)
Johnson & Johnson got a slight reprieve when Boston Scientific's popular drug-coated stents, which are used in heart surgery to keep blood vessels open, underwent a recall late this summer, helping the former company gain market share. Guidant is still readying its own version. (So is Medtronic.) Success at Guidant under Johnson & Johnson's roof would amount to a sharp competitive thrust and help assuage concerns about slowing growth projections. When you're huge, growing isn't so easy.
And this is not to mention that Guidant would likely become significantly more expensive as its product nears market. Both Boston Scientific and Medtronic investors saw their shares dip slightly yesterday, indicating that they're very mindful of the possibility.
Fool contributor Dave Marino-Nachison doesn't own any of the companies in this article.
