CHICAGO/PHILADELPHIA – Johnson & Johnson (JNJ) is weighing a higher takeover offer for medical-device maker Guidant Corp. (GDT) in a move to thwart a $25 billion bid from rival suitor Boston Scientific Corp. (BSX), a source familiar with the situation said on Wednesday.
The Guidant board of directors is meeting Wednesday afternoon with an announcement expected after the market closes, the source said.
J&J and Guidant have held discussions since Boston Scientific submitted its definitive bid for Guidant on Sunday, the source said. A decision on a potential new bid is imminent, said the source, who declined to be identified by name.
J&J agreed to buy Guidant in December 2004 to gain a greater share of the $10 billion market for devices that help regulate heart beats. But J&J slashed its offer in November following safety concerns and litigation over Guidant's heart products, opening the door for Boston Scientific to make its offer.
Boston Scientific, which makes cardiovascular devices and products used in oncology and urology, formalized its offer on Sunday and set a January 19 deadline for Guidant to respond. Guidant shareholders are scheduled to vote on the J&J pact on January 31.
J&J's offer is currently valued at about $64.36 a share, or $21.9 billion. Boston Scientific's offer, meanwhile, is valued at $72 a share, or $25 billion.
"Our $72 offer is higher than J&J's and there is strong upside potential over time," Boston Scientific spokesman Paul Donovan said in response to rumors that J&J would raise its bid. "Don't count us out."
"I think J&J is going to be very firm and very resolute, but I think they're probably willing to go a bit higher," said Steven Scruggs, the portfolio manager of Queens Road Funds, which owns J&J shares.
Scruggs said he would support a higher bid as long as it did not exceed $70.
"I think Guidant is worth more to J&J than it is to Boston Scientific," he added. "Boston Scientific probably could raise its bid, but anything over $72 is too much."
One trader, who asked not to be named, believes J&J will raise its offer to $70 per share, forcing Boston Scientific to increase its offer.
"Boston can probably stretch to $76. I don't know if they'll want to. They've already said they don't care about near-term dilution. If J&J is anywhere near $70, Boston will come back and raise it. They'll take out every piece of debt that the market is willing to lend."
Fund manager Sherwood Small, whose Boston Private Value Fund owns J&J shares, said both Boston Scientific and J&J need the Guidant unit that sells profitable implantable cardioverter defibrillators, among the fastest-growing segments of the medical device sector.
A 'BET-THE-RANCH DEAL'
"The difference is, for Boston Scientific, this is a bet-the-ranch deal," he said, adding that, if Boston Scientific is not successful in this contest, it will have to buy another company or else be bought itself.
Allen Michel, a merger and acquisition professor at Boston University School of Management, contends that the winner of the contest will be the loser.
"Whenever you have multiple bidding ... the firm that wins usually ends up paying too much. It's a phenomenon that's known on Wall Street as the 'winner's curse."'
He said it is plausible that a third party will come in with an offer, which would increase the chances that the ultimate acquirer of Guidant will pay more than the company is worth.
But options traders said the options market was not reflecting expectations for a bidding contest.
"When you look at the options in Guidant to see if there is any indication of speculation regarding an increase in the bid for the company from anyone, one indicator is the volatility of the at-the-money options," said Herb Kurlan, president of Vtrader, an online proprietary options and stock trading firm.
"The implied volatility of at-the-money calls in Guidant is around 18 percentage points ... for a takeover speculative stock that is not a very high volatility," he said.
Implied volatility is the anticipated volatility of the stock as suggested by its option prices.
Hedge fund Elliott Associates LP, a Guidant shareholder, on Tuesday urged Guidant to favor the Boston Scientific bid over the pact with J&J. The fund said "anything less than $71 per share from J&J should not be accepted."
Guidant shares were up $1.15, or 1.66 percent, at $70.54 afternoon trading on the New York Stock Exchange.
J&J declined to comment. Guidant could not be immediately reached for comment.