J&J WAS Right!

In a reflective mood as the New Year begins, we here at NotMakingThisUp have reviewed our case files in order to measure the worth, or lack thereof, of whatever it was we’ve chosen Not to Make Up over the months and years past.

Here begins our first in a series of re-prints from those files, and we hope they prove worthwhile to new readers as well as old.

And Happy New Year to All.

Monday, January 30, 2006

Maybe, Just Maybe, J&J Was Right All Along Having examined a Guidant deal three years ago and passed, the company [Boston Scientific] became intrigued at possibly taking advantage of a lower J&J bid. “J&J opened the door to us, and we’re gutsy enough to walk in,” said one Boston Scientific executive. —Wall Street Journal Thus the Journal reported how it was that Boston Scientific sprung its surprise $25 billion bid for Guidant just a few weeks after Johnson & Johnson had negotiated a price cut with the regulatory-entangled Guidant. Wall Street loves a good bidding war, of course—what with the duplicate advisory fees, duplicate legal fees, duplicate financing fees, and, in the end, the higher share price upon which so many other sharks in the tank can feed. But will Boston Scientific shareholders benefit from the company’s self-proclaimed “gutsy” move? Consider that J&J had agreed to buy Guidant in December 2004. Think about the number of J&J lawyers, finance people, doctors and consultants combing through Guidant, evaluating the business units product-by-product, working out the details of the merger and how the post-merged company would function. Consider the fact that the deal had to be approved by our Federal Trade Commission as well as the European Union, and think about how many individuals from both companies had to work together to convince hundreds of regulators around the world to approve the deal. Ask yourself how much J&J was spending on the deal—a million bucks a day? Two million a day? And consider the detailed due diligence J&J had thereby acquired on every aspect of Guidant during that entire process. Now, recall that six months after the deal was announced, Guidant reported a flaw in one of its defibrillators, and soon pulled five of the devices from the very market for which J&J wanted Guidant in the first place. And recall that J&J felt compelled to issue a press release describing these product issues as “serious matters,” but said it was working with Guidant to resolve the issue. Then think about why it was that J&J eventually lowered its deal price for Guidant—the very act which “opened the door” for Boston Scientific to swoop in with its dramatic, 11th Hour offer and ultimately prevail with the kind of high drama and stretched bid that Wall Street loves and for which it has been cheering on the BSX crew. And ask yourself who really knows more about Guidant and what it will take to restore its franchise and take advantage of the medical and demographic trends upon which the premise of the deal itself rests? Is it the folks at J&J who, metaphorically speaking, spent over a year roaming the House of Guidant, peering in the attic, ripping up floorboards, checking the plumbing and inspecting the roof? Or is it the outsiders at Boston Scientific, who drove by a house they had thought of buying three years ago, before the price tripled, but had passed on it—and now, admiring anew what they saw, found a friendly set of bankers and started bidding? “Gutsy” may be the right adjective for the bid-‘em-up folks at Boston Scientific—they’ve proved themselves full of that quality in years past. Time will prove whether “stupid,” “desperate,” “naive” or, perhaps, “brilliant” are better. © 2005 Jeff Matthews

Jeff Matthews I Am Not Making This Up

© 2007 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, nor is it a solicitation of business in any way. It is intended solely for the entertainment of the reader, and the author.