Johnson & Johnson (search) and Guidant Corp. (search) should reach a compromise in a battle over the price of their $25.4 billion merger agreement rather than walk away from the deal, shareholders and analysts said on Friday.

J&J wants to slash the price of its $76 per share pact to buy medical-device maker Guidant by as much as 18 percent, but its lower offers have been rebuffed, sources familiar with the situation said.

While J&J wants to pay in the low-$60's per share, Guidant is holding out for a price in the high-$60's per share, sources familiar with the situation said.

The companies have declined to comment.

Following recalls of some heart devices and related federal investigations, J&J contends that Guidant's long-term growth prospects and financial health have been damaged. As a result of this "material adverse change," J&J, a drug and consumer-products manufacturer, said it is not required to complete the acquisition.

J&J had agreed to buy Guidant in December 2004, in a move to expand its heart-device business and offset shrinking pharmaceutical sales that have been hurt by competition from cheaper, generic drugs.

"It's just hard for me to believe (J&J) will just say 'Forget it,' because I think they really want the business," said Sherwood Small, a fund manager with Boston Private Value fund, which holds stock in major pharmaceutical company J&J.

Guidant, meanwhile, said the problems were temporary and its suitor was legally obligated to complete the deal.

"Everyone knows (Guidant) is not worth $76 per share anymore, but if the offer is in the high $60s and J&J says $62, you guess where they'll meet. There's an old saying in the M&A business — a dollar for peace," said Small.

Still, accepting any cut in price would put Guidant's management team in a difficult bind, said Susquehanna Financial Group analyst Mark Landy.

"If (Guidant's) stance is that the recall hasn't hurt their market share or the company long-term, why not stand alone and prove it?" Landy said.

"If they do negotiate a lower price, they may open themselves up to litigation by essentially conceding that there has been a problem under management's watch," Landy said.

Lazard Capital Markets upgraded shares of Guidant to "buy" from "hold," saying it believes the odds are still in favor of the deal being completed. The brokerage firm reiterated its $68 price target on Guidant.

"They both have some to gain, but a lot to lose by walking away," said one Guidant shareholder who declined to be named. "Realistically, Guidant's value has been impaired, but it's in both of their interests to cut the baby in half and meet in the middle in price."

J&J contractually had 48 hours to close the deal following approval by antitrust regulators, which came through on Wednesday morning.

The 48-hour requirement to close the deal could be irrelevant if the two companies agreed to keep talking, one source familiar with the situation said.

Small said since the companies have not made a statement yet, they are probably still negotiating.

"It's a good sign in the sense that they're talking. From a business point of view, it would be a good thing, but either way, we haven't sold a (J&J) share."

Guidant may take its fight to court, sources said.

Such a move could be risky, according to a lawyer who specializes in mergers and acquisitions, since J&J may have a strong case due to the Justice Department's scrutiny of its product recalls and a lawsuit filed this week by New York State Attorney General Eliot Spitzer (search). Spitzer accused Guidant of hiding information about a defect in a heart defibrillator.

Since the 48-hour deadline to close the deal has passed, investors are anxious for any word from either or both of the companies about the status of the talks, said one trader who declined to be named.

"But that two-day period isn't written in stone. I think all the heavy lifting will be done this weekend, and if they can't come to an agreement, we'll hear about it Monday morning."

Shares of Guidant were up $1.12, or 2 percent, to $58.69 in late afternoon trading. J&J's stock shed 52 cents, or 0.8 percent, to $60.68. Both stocks trade on the New York Stock Exchange.