Boston Scientific's Slippery Slope

Boston's stock has fallen since it beat out J&J to buy Guidant. As the deal loses value and regulatory concerns arise, J&J could stage a comeback

So is the Johnson & Johnson (JNJ ) vs. Boston Scientific (BSX ) battle really over? Sure, Guidant (GDT ), the much-coveted device maker at the center of the J&J vs. Boston brawl, agreed to be acquired by Boston for $80 per share. And J&J got a nice parting gift: a $705 million breakup fee. But the story may not end there.

The reason: Boston Scientific's share price remains depressed. The stock, which fell 46 cents, to $23.54, on Jan. 25 -- the day the deal was announced -- has continued to slide. It rose a bit on Jan. 31, to $21.87. But that's still below $22.62, a very critical number because there's a collar on the Guidant deal. Collars are set prices at which companies guarantee the full value of the deal to shareholders.

NO GUARANTEES. Here's how it works. Under the collar, Boston will guarantee that the mix of stock and cash it gives to Guidant shareholders is worth $80 per share, as long as Boston Scientific's shares are worth at least $22.62. Below that floor, the deal is worth less. At Boston's Jan. 31 share price of just under $22, its offer is worth about $79 for each Guidant share. If Boston's price continues to fall, the value would drop further.

And plenty of risks could still weigh on Boston's stock. For one thing, while the company has been reassuring Wall Street that the deal is likely to pass muster with federal antitrust authorities, there are no guarantees. And on Jan. 26, Boston announced that the U.S. Food & Drug Administration had sent it a warning letter regarding "serious regulatory problems" at three of its facilities. The FDA, which has demanded a meeting with Boston executives to discuss the matter, made clear that new-product approvals could be held up until the problems are resolved.

As a result of the FDA news, Boston's stock dropped to just under $21 on Jan. 30. If the meeting doesn't go well and Boston can't quickly put the questions behind it, investors could send its shares down further.

DOUBLE-TEAM OFFENSIVE? A Boston spokesman didn't return calls seeking comment. But in a statement, President and Chief Executive Jim Tobin said, "We will work closely with the FDA to resolve these outstanding issues, and we believe we are on track to do so promptly."

Citigroup analyst Matthew Dodds has written that J&J could come back with a higher offer than its previous $71-per-share bid by teaming up with rival Medtronic (MDT ). If Boston's stock falls to $20 or below for any length of time, don't be surprised to see J&J rejoin the fray.

READER COMMENTS

Barrett is BusinessWeek's Philadelphia bureau chief

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