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Guidant hid flaw, Spitzer's suit says

Case could derail J&J acquisition

INDIANAPOLIS -- With one day left to seal the deal on Johnson & Johnson's $25.4 billion acquisition of Guidant Corp., New York Attorney General Eliot Spitzer said yesterday that he was suing the Indianapolis-based medical device maker, which he alleged concealed information about a design flaw in a heart defibrillator.

Even if the deal the two companies agreed to 10 months ago goes through, J&J is likely to pay significantly less than the original price, some experts said. And if J&J scraps it, the companies may find themselves in court.

While the agreement stipulates a $700 million breakup fee, J&J has already suggested that a stream of product recalls by Guidant, as well as federal investigations into the device maker, may have had the materially negative impact that would allow it to simply walk away.

The companies have until today to close the purchase.

''That deal is a goner -- it's DOA," said Anthony Sabino, a mergers and acquisitions attorney, after Spitzer's announcement. ''You could knock me over with a feather if they go through with this."

Spokesmen for New Brunswick, N.J.-based J&J and Guidant declined to comment.

Not everyone was convinced the companies would scrap their plans.

Alex Arrow, an analyst with Lazard Capital Markets, said he believed the deal would still go through, but at a significantly lower cost. ''We believe the main motivation behind [J&J's] statement may be to gain extra negotiating leverage," he wrote in a research note.

Analysts speculated the $76-per-share proposed acquisition price could drop as low as $60.

Since June, Guidant has recalled or issued warnings on about 88,000 defibrillators -- including its top seller, the Contak Renewal 3 -- and almost 200,000 pacemakers because of reported malfunctions. The company faces multiple lawsuits from patients and shareholders, as well as a reported criminal investigation by the Food and Drug Administration. Federal prosecutors in Boston and Minneapolis last week issued separate subpoenas seeking documents about Guidant's devices.

Spitzer accuses the company of failing to disclose a flaw in its Ventak Prizm 2 DR Model 1861 cardio defibrillator. He claims it failed 28 times, and one patient died.

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