December 7, 2005
More on Guidant/Johnson & Johnson/Boston Scientific
Posted by Bill Sjostrom
As discussed earlier, on 11/14/05 Johnson & Johnson (JNJ) and Guidant (GDT) entered into a revised merger agreement revising the price of JNJ’s acquisition of GDT down from $76 per share ($30.50 in cash + $45.60 in stock) to $63.43 per share ($33.25 in cash + $30.18 in stock). Boston Scientific (BSX) has since proposed paying $72 per share for GDT ($36 in cash + $36 in stock. Note that BSX has not made a binding offer to pay $72. Its press release makes this clear--the proposal is subject to “completion of a confirmatory due diligence review” and “final approval of our board and shareholders.” And just to be sure, the release also provides that “there will be no legally binding contract or agreement between us regarding the proposed transaction unless and until a definitive merger agreement is executed.”
As is common, the JNJ/GDT merger agreement contains a “no-shop” provision. This provision prohibits GDT from negotiating an alternative transaction with someone else, e.g., BSX. The provision, however, is subject to a “fiduciary out.” Pursuant to the out, GDT can negotiate with BSX concerning BSX’s proposal if “the Board of Directors of [GDT] reasonably determines (after consultation with outside counsel and a financial advisor of nationally recognized reputation) [that the BSX proposal] constitutes or is reasonably likely to lead to a Superior Proposal . . . .” A “Superior Proposal” is one which GDT’s Board of Directors determines “to be (i) more favorable to the shareholders of [GDT] from a financial point of view than the [JNJ/GDT] Merger (taking into account all the terms and conditions of such proposal and this Agreement (including any changes to the financial terms of this Agreement proposed by [JNJ] in response to such offer or otherwise)) and (ii) reasonably capable of being completed, taking into account all financial, legal, regulatory and other aspects of such proposal.”
Today GDT's board apparently determined that the BSX proposal constitutes a “Superior Proposal.” (See AP article). This is not suprising considering the price disparity. Thus, GDT can now allow BSX to conduct due diligence and can negotiate with BSX towards a definitive merger agreement. When and if a merger agreement is signed with BSX, GDT can terminate the JNJ merger agreement pursuant to its terms if after consultation with legal counsel and a financial advisor GDT's board determines that the BSX merger agreement is a “Superior Proposal.” If the GDT board does so, the ball would then be in JNJ’s court to up its bid or let BSX have the deal. If JNJ does walk at that point, it would be entitled to a $625 million bust-up fee from GDT.
Speculation is that JNJ will up its bid to $68 per share and perhaps make it all cash. While this is still lower than the $72 BSX has proposed, the GDT board could judge it to be superior when taking into account non-price factors such as the form of consideration, regulatory requirements, financing issues, timing, etc. On the antitrust front, BSX has said it is “prepared to divest Guidant’s vascular intervention and endovascular businesses, while retaining shared rights to Guidant’s drug eluting stent program.” This adds a complication that is not present in the JNJ deal.
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