The Worst Merger Ever: Boston Scientific (BSX) and Guidant

BSX paid $27.2 billion for GDT in 2006 - and even paid JNJ $700 million to break up the deal between JNJ and GDT. Early in 2006, prior to announcing their interest in this acquisition, BSX had a market cap of around $25 billion.

Now just four years later, the combined valuation of BSX and GDT has a market cap of $10 billion. So the merger has resulted in a decrease in market cap of the combined company by more than 80%.

Over the same period, companies in the same areas like JNJ and MDT are roughly flat in valuation. The AOL deal, on the other hand, was in large part a story about the bursting of the tech bubble.

This is a story of hubris and incompetence. The management of BSX overreached, buying a very large, very troubled company for vastly too much money. They overpaid, and then issued themselves large bonuses to reward themselves for their mismanagement.

Recently, BSX settled long going patent dispute, agreeing to pay JNJ $1.7 billion. When you add in the break up fee they paid JNJ a few years ago, JNJ has made $2.4 billion from BSX. It seems that the only people who make any money on BSX are their competitors and the short sellers.

Yesterday, the company outdid themselves: BSX announced that they were recalling indefinitely all of their defibrillators and biventricular defibrillators. Apparently, they failed to submit the appropriate paperwork to the FDA regarding a change to manufacturing processes. This is inexcusable. These devices represent more than $1 billion in annual sales. The Guidant division of BSX has been making pacemakers and defibrillators for years. It is hard to imagine that they could be so poorly managed that they forgot to do routine paperwork.

When I last wrote about this stock in July 2007 it was my favorite short in the healthcare industry. See my article here.

Unfortunately, I closed my short positions long ago- when the stock got to about $15. Now the stock in down to under $7. They have huge amounts of debt, and one has to wonder if they can remain solvent without dramatically reduced revenues from the Guidant products.