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Johnson & Johnson Merger Hits Snag

RENEE MONTAGNE, host:

Time now for business news.

The merger of Johnson & Johnson and Guidant Corporation apparently has some problems. The government approved the transaction yesterday, clearing the way for the deal to close. Instead, the two sides launched an unusual public sparring match. NPR's Snigdha Prakash reports.

SNIGDHA PRAKASH reporting:

Yesterday's Federal Trade Commission approval started a countdown. Johnson & Johnson now had 48 hours to pay $25.4 billion and close the deal with Guidant. Instead J&J announced it wasn't bound by the contract anymore because Guidant's business had been hurt by product recalls and government investigations. Thom Gunderson is a health-care analyst at Piper Jaffray & Company.

Mr. THOM GUNDERSON (Piper Jaffray & Company): What is J&J saying today with its press announcement? It's finally coming out and saying basically what I interpret to be, `We need a lower price or this deal is not going to happen.'

PRAKASH: Back in December when the deal was negotiated, J&J saw it as a chance to get Guidant's large piece of the growing market for cardiac defibrillators. Those are devices that shock an irregularly beating heart into a regular rhythm. Their use has been fueled by improvements in technology and research that shows that they're effective in preventing sudden heart failures. A few months after the deal was negotiated, a 21-year-old died after his Guidant's defibrillator malfunctioned. It emerged that Guidant knew about the chance of malfunction and the company had actually developed a new model that fixed the problem, but it continued to sell the older one and it didn't tell doctors about the problem. Guidant eventually recalled thousands of the devices. Now it's being investigated by the Food and Drug Administration and the Justice Department.

Gunderson says J&J is pushing hard for a lower price because the findings of the government investigations could result in fines or even criminal charges. He says from J&J's point of view, there's another problem with this deal.

Mr. GUNDERSON: J&J, it's a bigger organization. They've been around for a very long time. They have a very polished brand name. And they want to make sure that they don't step into something that could taint J&J at some point in the future.

PRAKASH: J&J's statement said it had been talking to Guidant about a lower price but to no avail and that there was no guarantee the talks would resume, and if they did, that there would be a new agreement.

Guidant issued its own press release. Bruce Nudell is an analyst at Sanford Bernstein & Company.

Mr. BRUCE NUDELL (Sanford C. Bernstein & Co.): Guidant basically said they're obligated to go through with the deal and that the deal still makes strategic sense in their view. And this will play out over days, weeks or months.

PRAKASH: Investors may play a role in the resolution. Yesterday, they drove down Guidant's price to a new low of around $60. If J&J were to buy Guidant at the price originally negotiated, each Guidant share would be valued at more than $75.

Snigdha Prakash, NPR News, Washington. Transcript provided by NPR, Copyright NPR.

Snigdha Prakash
Pieces by National Desk reporter Snigdha Prakash can be heard on NPR's All Things Considered and Morning Edition. The majority of Snigdha's past reports have focused on topics related to entrepreneurship, business, banking and the economy.