The increasingly fraught merger of Johnson & Johnson and Guidant appeared on Monday to be heading for the courts, after the US medical devices group filed a civil lawsuit to force J&J to honour the $25bn (£14.3bn, €21.2bn) deal.
J&J was supposed to have taken control of Guidant last Friday, but has refused to close the deal because it believes that a series of product recalls damaged Guidant’s business enough to give it the right to walk away. For weeks, the two companies have been holding talks to agree on a lower price but have been unable to find common ground.
Although a negotiated agreement between Guidant and J&J could still occur, the legal challenge by Guidant, mounted in US District Court in Manhattan, raises the prospect of a protracted legal battle that could prove damaging and distracting to both sides.
The outcome is likely to be closely monitored among investment bankers and lawyers focused on mergers and acquisitions, as it could set a precedent regarding the definition of “material adverse effect” clauses, which set the conditions under which takeovers can be abandoned.
Guidant’s filing came as the company reported a sharp drop in sales and earnings during the third quarter, when it decided to recall a number of heart devices because of defects linked to patients’ deaths.
Overall, sales at Guidant fell 14 per cent to $795m in the quarter. Sales of implantable defibrillators – one of Guidant’s key products – dropped 26 per cent to $331m worldwide. Net income was $65m against $161m previously.
The combination of the failed talks and the poor results sent Guidant’s shares down a further 3.9 per cent in morning trading. Guidant shares ended Monday’s session down 2.4 per cent at $57.52 - much lower than the $76 at which J&J agreed to acquire the company in December 2004. J&J shares moved 0.9 per cent higher to $61.43.
In taking J&J to court, Guidant said it was seeking “specific performance” from the court that J&J failed to do what it was supposed to in the merger agreement. J&J responded by saying that it was not required to complete the deal and it would “vigorously” oppose the lawsuit: “The company views the previously announced product recalls at Guidant and the related regulatory investigations, claims and other developments as serious matters affecting both Guidant’s short-term results and long-term outlook.”
Meanwhile, Guidant’s regulatory woes appeared to deepen when it disclosed that the Securities and Exchange Commission had started a formal inquiry into the company’s product disclosures and trading in Guidant stock, without providing any more detail. Guidant said it was co-operating with the probe.
Full Guidant filing: Click here