-- Guidant Corp. sued Johnson & Johnson on Monday in an attempt to force it to complete a $25.4 billion acquisition of the medical-device maker, which has been roiled by a series of recalls.
The lawsuit, filed in U.S. District Court in Manhattan, comes after Friday's deadline passed for completing the deal. Analysts and lawyers said the suit signals that the two sides have failed to renegotiate the acquisition and that it will probably dissolve.
Meanwhile, Guidant's problems mounted as it reported sharply lower third-quarter earnings on Monday and disclosed it was under investigation by the Securities and Exchange Commission. The company said the probe concerns product disclosures and trading in the company stock. SEC spokesman John Heine said the agency does not confirm, deny or comment on ongoing investigations.
"I don't see where this deal can be salvaged," said Robert Gold, an analyst at Standard & Poor's, who downgraded Guidant stock Monday to a strong sell from a hold. "I don't think J&J wants to risk its own reputation . . . I think Guidant is an impaired asset."
The lawsuit followed days of speculation that Johnson & Johnson would walk away after warning last Wednesday that it was no longer obligated to complete the purchase because the recalls have had a material adverse effect on Guidant, triggering an out clause in the contract. Johnson & Johnson said the two companies had discussed restructuring the transaction, though no agreement had been reached.
In a statement, Johnson & Johnson said it "will vigorously oppose the lawsuit and take all necessary action to enforce its rights under the merger agreement." The company declined to comment further.
Guidant also declined to comment, but the lawsuit said the recalls and related problems do not constitute the material adverse event that would have allowed Johnson & Johnson to walk away from the deal.
Starting in June, Guidant has recalled or issued warnings about 88,000 heart defibrillators and almost 200,000 pacemakers because of reported malfunctions. The company faces multiple lawsuits from patients and shareholders and is also under investigation by the Justice Department. Last week, New York Attorney General Eliot Spitzer sued Guidant for fraud, accusing it of not telling doctors about a potentially fatal flaw in some of its defibrillators.
On Monday, Guidant said its third-quarter profit dropped 57 percent, to $65.4 million from $153.6 million in the year-ago period. The latest figure includes costs of $28 million related to regulatory actions on its devices. Revenue fell 14 percent to $795 million from $924.5 million.
Guidant shares fell $1.40, or 2.4 percent, to close at $57.52 Monday on the New York Stock Exchange, while Johnson & Johnson shares rose 55 cents to close at $61.43.