Johnson & Johnson warned yesterday that it might pull out of its proposed $25.4 billion dollar acquisition of medical device maker Guidant because of the hefty liabilities the latter firm faces. Guidant’s share price fell more than 4% as a result, despite assurances by its management that J&J is obligated to complete the deal.

Since June, Guidant has recalled or issued warnings about 88,000 heart defibrillators and almost 200,000 pacemakers because of reported malfunctions [[19/10/05i]] [[20/07/05j]]. This has led to suggestions that the price being paid by J&J for the business – $76 a share while Guidant closed trading at $60.40 yesterday – is over the top [[20/10/05b]].

But with conditional antitrust approval of the acquisition coming through from the Federal trade Commission yesterday, the clock is ticking for J&J. It must now move to complete the purchase, negotiate a new deal or walk away on the grounds that there has been a material change in Guidant’s business which renders the original agreement void. Pulling out of the deal would almost certainly lead to a courtroom struggle between the firms, according to observers.

"J&J believes that these events have had a material adverse effect on Guidant and as a result, that it is not required under the terms of the merger agreement to close the Guidant acquisition," the company said in a press release.

Guidant retorted by saying: “Recent product and communications issues have certainly had an impact on our business in the near term. However, we believe that the fundamentals of our business are strong and our markets and products have attractive prospects for growth.”

If the case came to court and J&J lost, the company would face a penalty of $700 million for breaking the contract, while Guidant would be liable for $750 million if J&J’s position were proved, according to a Reuters report.

Analysts said J&J is unprepared to pay $76 a share, and would be prepared to take the $700 million penalty if it can’t negotiate a lower price. Under the terms of the agreement, the acquisition terms become void if the deal doesn’t close by February 2006.

The FTC and Europe’s antitrust authority have both stipulated that J&J would need to shed certain businesses – including some elements in its drug-eluting stent portfolio, endoscopic vessel harvesting products, and anastomotic assist devices.