Wednesday, November 28, 2012

Eight years on: Boston Scientific is still to recover completely from its Guidant acquisition


In the HBR article ‘Seven ways to fail big’, authors Carrroll and Mui talk about the disastrous consequences of going through with a strategy without looking at the bigger picture. They talk about the dangers of not-so-apparent strategic blunders such as ‘The synergy mirage’, ‘Faulty financial engineering’ and ‘The rush to consolidate’. In light of this article, and specifically the three points mentioned above, I’d like to analyze Boston Scientific’s ill-fated 2006 acquisition of Guidant.
Boston Scientific’s acquisition of Guidant is one of the most controversial deals in the history of the healthcare industry. Boston Scientific is a global medical device manufacturer that in 2005 had tremendous growth potential. At the end of 2005, they had profits of $1.6 billion on revenues of $5.6 billion. Guidant was an Eli Lilly spin off that manufactured pacemakers and defibrillators. At that time, cardiac rhythm management (CRM) was a growing market, and several device makers were trying to expand in that market segment. Guidant first received an offer from healthcare behemoth Johnson and Johnson. Boston Scientific outbid J&J in an intense bidding war and took on more than $6 billion in debt to snatch Guidant away from J&J for $27.3 billion.





On some level, it is easy to see why Boston Scientific coveted Guidant so much. Combined, they appeared to have a great synergy together. The company already had a strong cardiovascular product line and Guidant’s expertise in CRM enabled them to expand into a related, relatively untapped market segment with minimal sales retraining. At the same time, they would lock J&J, one of their biggest competitors, out of the CRM market. To be fair, this strategy did work partially. J&J, till date, does not have a strong foothold in the CRM business. Moreover, the company’s stock price had been showing a steady decline, and there was significant pressure to turn that trend around.

However, in their eagerness to move ahead of their competition, Boston Scientific made some blunders. First, Guidant had been plagued with defective devices, issues that had come to light even before the bidding war started.  Product recalls should have been a warning sign for Boston Scientific, but it is likely that they did not realize, or chose not to see, the seriousness of the problem. Within three months of inking the Guidant deal, Boston Scientific recalled 23,000 defibrillators. In 2010, it even shut down its defibrillator sales to deal with quality issues, although it currently has a defibrillator in its product line.  Secondly, the Guidant acquisition was largely debt financed. Taking on such a huge debt, to the tune of $6 billion, for a company that had such severe quality issues is questionable. Boston Scientific was then slapped with several lawsuits for the defective devices; it has paid close to half a billion dollars in patient settlements and FDA fines till date, with at least 30 more lawsuits pending.
Boston Scientific's stock price: 2002-present.

The stock never recovered either. Prior to the Guidant acquisition, Boston Scientific traded at more than $25 per share. Today, more than eight years later, the Boston Scientific stock languishes at around $5.60. Forbes called it the 'second worst  deal of all time' (after AOL/Time Warner).

Do you think that the Guidant acquisition was in any way justified? Is there any way that Boston Scientific can turn this around and make it work? Do you think there were alternate ways in which Boston Scientific could have achieved its goals?

References:
http://www.nytimes.com/2006/06/27/technology/27iht-guidant.2062257.html
http://seekingalpha.com/article/407411-boston-scientific-s-guidant-acquisition-led-to-fines-settlements-and-penalties-but-that-s-just-the-beginning-of-its-woes
http://money.cnn.com/magazines/fortune/fortune_archive/2006/10/16/8390284/index.htm
Paul B. Carroll and Chunka Mui (2008) "Seven ways to fail big" Harvard Business Review; September: 82-91

Financial information and stock prices from Yahoo! Finance.



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