Johnson & Johnson Reportedly in Bid To Take Over Guidant

The health care industry might be next in line for the type of mega-merger that has already rocked the retail and wireless communications sectors, with Johnson & Johnson (NYSE: JNJ) reportedly mulling a takeover of Guidant in a deal that could be worth more than US$24 billion.

Published reports said that J&J has been in detailed talks to buy Guidant, which makes implantable defibrillators and other heart devices, a market that is forecast to be worth just under $5 billion this year.

The move would boost J&J, which has seen competitor Boston Scientific surpass it in the heart stent market, the fastest growing segment of the medical device industry. Stents are used to keep blood vessels open after angioplasty.

Neither company is commenting on the reports, which have suggested the deal could be made public as soon as sometime next week. Shares of Johnson & Johnson were trading lower by about 2 percent in afternoon activity today, at $60.51, while Guidant shares were up more than 5 percent to $72.32.

Trend Lines

If the deal comes to pass, it would be the third largest deal by value this year, behind JP Morgan Chase's $58 million buy of Bank One (NYSE: ONE) and Cingular's purchase of AT&T (NYSE: T) Wireless for $41 billion.

There have also been a slew of other deals, from Kmart's $11 billion buy of the venerable Sears chain to Computer Associates' $430 million purchase of Netegrity, that have extended the uptick in merger and acquisition (M&A) activity to virtually every sector in the economy.

That increase is good news for the venture capital industry, which benefits when companies that investors buy into early in their life-spans are bought up at high valuations.

"We're seeing more deals, which frees up capital and creates additional opportunities for investment for companies in their earlier stages," National Venture Capital Association President Mark Heesen said. "We are seeing a healthier 2004 on the M&A front."

Challenges Ahead

Larraine Segil, an M&A expert with consulting firm Vantage Partners, said if J&J completes the deal, it will have to be careful not to stunt the growth that Guidant has managed to post. That will mean working to ensure that the company's executives stay in place, for one, and being careful while merging the two cultures, a big reason many deals fail.

"In various acquisitions that J&J has made in the past, the founder CEO left after a year or so rather than staying for the duration of his management contract," Segil said. While different cultures can be set aside in the early days after a merger, they often demand attention down the road. "Around three-and-a-half years into the relationship is where about 70 percent of these kinds of deals start to falter."

Many financial analysts were quick to endorse the merger, with some describing it as a win-win that would give Guidant additional reach for its products and provide for huge cost-savings opportunities by merging sales forces, research, production and other activities.

Some analysts said the reported $75 per share deal being rumored for the purchase could go as high as $85 and still leave room for J&J to recoup to outlay from additional revenue and cost savings.