Johnson & Johnson’s decision in late 2004 to enter the market for implanted heart devices by acquiring Guidant Corporate for $25.4 billion the decision was met with market approval. But the pending corporate nuptials hit some rough pavement in May 2005 when Guidant disclosed an electrical flaw in one of its defibrillators that caused it to repeatedly fail. The revelation triggered regulatory scrutiny, product recalls, a Department of Justice investigation, and a suit by New York attorney general Eliot Spitzer.

     When Guidant’s third quarter profits fell by 57% J&J threatened to walk from the deal if the share price was not renegotiated. Guidant said no, a deal’s a deal and in November it sued J&J to enforce the contract. Faced with the prospect of a protracted legal battle the two companies ultimately agreed to cut the price to $21.5 billion, but by December Boston Scientific was dangling an offer of $25 billion subject to completion of due diligence – a study of the company’s records and operations.

     In the meantime, Guidant’s deal with J&J required Guidant to present the deal to shareholders in a timely fashion. Guidant’s board of directors unanimously reaffirmed support for merging with J&J by the end of December and set the date for shareholder approval on January 31, 2006. All the while the race is on for Boston Scientific to formalize their offer. What’s it going to be? Is the deal with J&J on? Yes? No? No? Yes?

     Before the year end, however, Guidant received a warning letter from the Food and Drug Administration denying a request for export certificates and other licensing applications until Guidant completed further regulatory remedial action. The FDA letter created renewed concerns about Guidant’s product safety and further fall-out from product recalls earlier in the year. Happy New Year!

     Guidant’s story is a cautionary tale of how product liability can trigger expensive product recalls and government investigations and how it can detract from earnings to the point of shaking investor confidence. Eliminating blind spots and developing a greater appreciation for the letter and spirit of the law on the front end would have saved a lot of heartache, time, and money on the backend.

This entry was posted on Sunday, January 1st, 2006 at 3:41 pm and is filed under Business Blind Spots, Compliance, Corporate Governance, Costs, Decision Making, Leadership, Rule of Law. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.