Have you ever wanted to win that stuffed animal for your child at the local fair?  The ball toss looks fairly simple.  The object is to toss the ball into an apple basket nailed against the wall without the ball bouncing back out.  A $1.50 buys you three throws.  The first time you miss.  The second time the ball bounces off the rim.  The third time it goes in but bounces back out.  Without thinking you plunk down another $1.50 and try again.  You almost had it.  Victory is within reach and you’re determined to win that toy.  The chorus of tiny voices chanting “you can do it” only steels your resolve. Before you know it you’ve spent over $30 for a $5 toy.  But ah yes, you’ve captured the prize, you won.  Victory is sweet though short lived.

     That’s what the bidding war between Johnson & Johnson and Boston Scientific over heart defibrillator and pacemaker manufacturer Guidant is starting to remind me of.  On January 1, 2006 this website listed the deal among the 2005 Top 10 (#6 A Real Heart Stopper) because Guidant’s overall regulatory record and product recall in 2005 prompted J&J to renegotiate the deal price from $25 billion to $21.4 billion.  The drop in price and the reconsideration delayed the deal and represented a hidden cost associated with poor compliance.  If it wasn’t for the compliance issues casting doubt on the robustness of the Guidant’s legal health, the deal would have already closed.  It already had regulatory approval. 

     The price dispute, however, opened the door for Boston Scientific to get some balls and join the game.  Boston submitted a tentative offer of $25 billion subject to the completion of its due diligence.  J&J countered with $23.2 billion and a quick closing date, and then sweetened it to $24.2 billion.  Boston Scientific has now come back with $27 billion – two billion, more than the original deal.  It looks like the compliance issues have been heavily discounted in the crush to win the prize.

     Some experienced deal makers are starting to question the high valuation.  “In my opinion, companies that get into this kind of bidding contest often experience buyers’ remorse.  They pay too much,” said one.    I couldn’t agree more.  Nobody likes to lose.  In the race to win it’s easy to overlook inconvenient facts or to reframe them in a more favorable light.

     Legal risk is what it is.  It’s easy to underestimate.  In the short-term such discounting only contributes to nose-bleed valuations.  In the long-term it leads to self-defeating math unless properly managed.  Stay tuned as the Guidant saga continues to unfold.

This entry was posted on Wednesday, January 18th, 2006 at 7:51 pm and is filed under Business Blind Spots, Costs, Decision Making, Leadership. 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.