Global Insight Perspective | |
Significance | U.S. healthcare giant J&J has filed a lawsuit against Boston Scientific and Abbott Laboratories, seeking US$5.5 billion in damages over its failed attempt to acquire Guidant earlier in the year. |
Implications | In its lawsuit, J&J alleges that Boston Scientific and Abbott "induced" Guidant to reveal confidential information, which gave them an unfair advantage as they attempted to outbid J&J for Guidant. |
Outlook | These allegations pose a significant risk for Boston Scientific. However the onus will be on J&J to prove their claims, and this could potentially provide a significant barrier to the company’s success in the lawsuit. |
Storm Brews over "Prepackaged Divesture"
U.S. healthcare conglomerate Johnson & Johnson (J&J) has opened up a new front in its bitter rivalry with Boston Scientific by filing a lawsuit against the company, as well as U.S. pharma heavyweight Abbott. J&J is seeking more than US$5.5 billion in damages, relating to its failure earlier in the year to acquire cardiac device specialist Guidant. In its lawsuit, J&J alleges that representatives of Guidant had leaked confidential information that had allowed the arrangement of "a prepackaged divestiture of significant Guidant businesses to Abbott". J&J claims that this contravened the terms of a previously signed merger agreement between itself and Guidant, and also claims that without this “pre-packaged divestiture agreement", Boston Scientific could not have made a proposal that would have been acceptable to Guidant’s board.
A Bitter Contest
J&J and Boston Scientific have locked horns in courtroom battles on several previous occasions. The majority of these legal clashes have involved patent disputes over the companies' rival products Taxus (Boston Scientific) and Cypher (J&J), which compete in the US$5 billion U.S. market for drug-eluting stents. However, the battle between the two firms escalated earlier this year, when Boston Scientific won an aggressively fought bidding war to acquire Guidant. Despite its financial muscle, J&J eventually dropped out of the race, feeling that it was unable to raise its bid of US$24 billion to trump Boston Scientific's final US$27 billion offer. The J&J board said at the time that such a move "would not have been in the best interests of its shareholders".
An important factor in Boston Scientific's ability to pay such a premium over J&J’s bid for Guidant was a separate side deal that the company struck with Abbott Laboratories, over Guidant's vascular business. This deal not only prevented a lengthy and uncertain anti-trust review of the deal, but also provided a significant financial contribution to Boston Scientific’s bid. In exchange for Guidant’s vascular business, Abbott paid US$4.1 billion to Boston Scientific, and committed to purchase around US$1.4 billion of the latter's common stock. In its lawsuit against Abbott and Boston Scientific, J&J is asking the U.S. courts to rule that the way in which this deal was brokered breached the terms of the merger agreement that the company had previously forged with Guidant.
Boston Scientific Claims Innocence
In statements to the press, Boston Scientific refuted J&J’s claims that the company had failed to comply with the terms of the J&J/Guidant merger agreement during its acquisition negotiations for Guidant. Company spokesman Paul Donovan described J&J’s allegations as being "meritless", adding that Boston Scientific officials "find it curious that J&J has chosen to sue eight months after Boston Scientific entered into a definitive agreement with Guidant, and five months after the transaction closed".
Outlook and Implications
In some respects, observers may have expected J&J to be relieved that it did not eventually secure a tie-up with Guidant. Not only did the healthcare giant receive a US$705 million break-up fee for its failure to secure a deal with the company, but a plethora of outstanding legal and regulatory problems at Guidant continue to drag on Boston Scientific's revenues from its former products. However, by filing this lawsuit against Boston Scientific and Abbott, J&J appears to be indicating that it intends to play hardball, and that it will do all it can to protect its business in the competitive molecular devices market.
One possible explanation for J&J's significant delay in launching this legal challenge could be that it has taken until now to accumulate sufficient evidence upon which to proceed with such a lawsuit. According to Joel Greenberg, an M&A attorney quoted by the Wall Street Journal, J&J’s is a "tricky claim", as "courts tend to be fairly protective of boards' abilities to explore alternative transactions". However, it certainly brings a fairly hefty overhang to Boston Scientific’s business. Standard’s & Poor's analyst Rob Gold told Morningstar that Abbott’s due diligence may well have "violated the terms of J&J’s offer for Guidant".
One final interesting aspect of J&J's legal challenge to Boston Scientific and Abbott is the impact it may have on Bristol-Myers Squibb (BMS, U.S.). This company recently appointed Guidant’s former chief executive officer (CEO) James Cornelius as its interim CEO. The executive has not yet commented on the lawsuit, according to the Associated Press, although it will no doubt form a much-unwanted distraction as he attempts to steer a turnaround at the U.S. pharma giant.
Related Articles:
- United States: 26 January 2006: Boston Scientific Prevails in Battle for Guidant, J&J Demands US$705 mil. for Deal Break-Up