Nov. 15 (Bloomberg) -- Johnson & Johnson salvaged its takeover of heart-device maker Guidant Corp. with an agreement to cut the price by $4 billion because of investigations into recalls of implantable defibrillators.

The value of the acquisition, the largest in J&J's 119-year history, will be reduced by 15 percent to $21.5 billion. Holders of Indianapolis-based Guidant, the second-biggest maker of cardiac defibrillators, will receive $63.08 in cash and J&J stock for each of their shares, the companies said today.

``They've gotten a much fairer price,'' said John Putnam, an analyst at Boca Raton, Florida-based Stanford Group. ``J&J needs to make a fairly large acquisition to rejuvenate its growth.''

Buying Guidant will give J&J Chief Executive Officer William Weldon a piece of the fastest-growing medical technology: implantable defibrillators and pacemakers, a $10 billion-a-year global market, according to Miller Tabak and Co. health-care strategist Les Funtleyder in New York. Johnson & Johnson is already the world's biggest maker of medical devices.

Johnson & Johnson, based in New Brunswick, New Jersey, had threatened to abandon the purchase because Guidant refused to accept revised terms after recalling 109,000 faulty heart defibrillators in June. Defibrillators, costing $20,000 to $30,000 each, use electrical shocks to correct a faltering heartbeat. Guidant sued J&J Nov. 7 to force completion of the transaction at the original price. The lawsuit was dismissed, according to J&J officials.

Revised Terms

Guidant shares jumped $4.75, or 8.2 percent, to close at $62.50 in New York Stock Exchange composite trading. The stock had dropped as low as $56.53 on Nov. 8, 26 percent below the price J&J set in December. Guidant ranks behind No. 1 Medtronic Inc. in defibrillator sales.

Johnson & Johnson gained $2.32, or 3.8 percent, to close at $62.83. Stanford analyst Putnam, the No. 1-ranked J&J analyst based on data compiled by Bloomberg, has a ``hold'' rating on Johnson & Johnson.

Under the revised terms, J&J will pay $33.25 in cash and 0.493 share of Johnson & Johnson for each of Guidant's 340 million fully diluted shares. The companies said the net cost of the transaction, including estimated Guidant cash on hand when the deal closes, will be $19 billion, based on yesterday's price for J&J stock.

The transaction, cleared by both companies' boards, is subject to a new vote by Guidant shareholders, and no further review by federal regulators is likely, J&J said. The companies said they expect to close the deal in the first quarter of 2006.

Dollens to Retire

In addition, Guidant said Ronald W. Dollens, 58, will pursue his previously announced plan to retire as chief executive officer after 11 years at the helm, effective today. James M. Cornelius, 62, the former Eli Lilly & Co. chief financial officer who is Guidant's non-executive chairman, will serve as interim CEO, Guidant said.

``J&J's aggressive negotiating tactic prevailed in the end,'' said S.G. Cowen & Co. LLC analyst Dhulsini de Zoysa in New York, who doesn't use a rating system or own the shares, in a note to clients. ``We think J&J got Guidant for a steal.''

Guidant's misfortunes demanded a reconfigured deal, said Nancy Havens, who runs Havens Advisors LLC, a $200 million hedge fund based in New York that owns Guidant shares and has a short position in J&J.

``When they first did this acquisition, J&J was paying a premium price for a premium franchise, and now they're paying an average price for an average franchise,'' she said.

Guidant holders don't like the new price, said Jan David Wald, an A.G. Edwards & Sons analyst in Boston who rates both companies ``hold'' and owns shares in each.

J&J Growth

``I'm not sure that the problems they've had with recalls are worth that much of a decrement in value,'' Wald said in a telephone interview today.

The purchase of Guidant will add about 3 percent to J&J's annual growth rate from 2006 through 2008, said Chief Financial Officer Robert Darretta in a conference call with analysts today.

``Our pharmaceutical business is achieving very modest top- line growth coupled with very accelerated research and development,'' Darretta said.

Darretta and Nicholas J. Valeriani, a member of J&J's executive committee, said the company will expand Guidant's sales force and invest in marketing and product development to restore market share lost since the recalls. They said they have no interest in rebranding Guidant's devices to distance J&J from the defibrillator problems.

Recall

Guidant recalled the defibrillators starting in June because of defects linked to at least two patient deaths. Last month, U.S. Food and Drug Administration inspectors said Guidant failed to ensure the quality of its devices and waited too long to warn doctors of risks. Darretta and Valeriani said they expect no ``draconian'' regulatory actions.

Johnson & Johnson has a straight-arrow image that will rescue Guidant, said Havens, the hedge fund chief.

``The simple fact that J&J is taking over Guidant at all sort of does something to help clean up their image,'' she said. ``If J&J had walked, Guidant would have had much more difficulty turning around as a business.''

Antitrust Approval

New York Attorney General Eliot Spitzer sued Guidant Nov. 2, saying the company failed to tell doctors of a design flaw in one model that might have fatal consequences. The regulatory probes and lost market share had ``a materially adverse effect on Guidant,'' J&J said Nov. 2.

J&J won antitrust approval for the combination from the U.S. Federal Trade Commission Nov. 2 after agreeing to certain divestitures. J&J is licensing Guidant's cardiac-stent delivery technology to Abbott Laboratories and selling a blood-vessel harvesting product to Datascope Corp. of Montvale, New Jersey.

Spitzer's complaint contends that Guidant committed fraud by failing to inform doctors until this year that its Ventak Prizm 2 DR Model 1861 defibrillator could malfunction with potentially fatal results.

Guidant discovered in February 2002 that damage to an insulator covering wires in the Prizm 2 caused short circuits in some devices, Spitzer's suit said.

The company corrected the flaw in production and continued to sell devices manufactured before the change, the suit said. Doctors had no way of knowing whether they were buying a flawed device, it said.

To contact the reporters on this story: Avram Goldstein in Washington at agoldstein1@bloomberg.net; John Lauerman in Boston at jlauerman@bloomberg.net.

Last Updated: November 15, 2005 16:50 EST