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The bidding war for troubled heart device maker Guidant may be over, with Boston Scientific winning. But now Wall Street is wondering what Johnson & Johnson might do with the $25 billion burining a hole in its pocket.

Guidant agreed to Boston Scientific’s $27-billion offer on Wednesday after the deadline for Johnson & Johnson to raise its $24.2-billion bid for the heart device maker expired midnight the previous day (see Guidant Picks Boston for $27B). J&J is expected to pick up another $705 million as a break-up penalty.

Despite Guidant’s bevy of problems this year including product recalls, lawsuits, and federal investigations, the Indianapolis-based company still remained an object of desire for its two suitors (see Guidant Gets FDA Warning, 3 Deaths Linked to Devices, Eliot Spitzer Sues Guidant, Recall of Guidant Pacemakers, Med Device Makers Subpoenaed, Guidant’s Troubles Aren’t Over).

The reason? Guidant could pave the acquirer’s way into the heart rhythm management market that research firm Frost & Sullivan says is worth about $8.5 billion.

“The market is highly restrictive,” said Frost & Sullivan research analyst Venkat Rajan, about the specialty area most famed for devices like pacemakers and defibrillators.

“New entrants have a lot of barriers to market,” he said, which is why there are so few companies on the market. The high barrier also makes acquisition the choice option for companies looking to gain a foothold in an industry. The research firm predicts the industry could have 20 percent compound annual growth rate for the next six to seven years.

Five Key Players

In total there are five key players in the space. Medtronic is the market share leader, with 51 percent ownership, according to Frost & Sullivan. The firm puts St. Jude Medical and Guidant as having equal share at 20 percent each. The remaining 9 percent goes to two European-based companies.

Now that Guidant has been matched up, Wall Street is wondering whether other companies in the heart rhythm management industry might be approached for a potential merger. When asked if J&J might be up to tempting another, “I wouldn’t be surprised,” said Morningstar equity analyst Debbie Wang.

J&J has repeatedly stated that it doesn’t comment on its acquisition strategy.

Among the slim pickings, Wall Street has speculated that either St. Jude or Medtronic could be the acquisitions of choice for J&J.

Many have favored St. Jude as the more likely target, citing a cheaper purchase price. St. Jude holds a market cap of $18.19 billion with 2005 annual sales hitting $2.92 billion. Meanwhile, Medtronic’s market cap weighed in at $69.19 billion and its 2005 annual sales reached $10.05 billion.

“St. Jude would cause fewer problems from an antitrust issue. There is less overlap between their products,” Ms. Wang said as another reason J&J might go for the apostle-named company.

J&J’s Deep Pockets

Ms. Wang said St. Jude has bid up on the acquisition speculations that have been circulating. As a result, “It already has a takeover premium built into that stock price,” she said.

But J&J, a company with annual sales reaching $50.51 billion, is not short on cash. And with the breakup fee coming its way, the company has the funds to buy a medical giant like Medtronic.

“It would certainly be a larger acquisition,” Ms. Wang said. Medtronic also poses more antitrust issues to sort out due to more product overlap, she said.

One deal Wall Street doesn’t see: a teaming up of Medtronic and St. Jude.

“I don’t know what Medtronic would get out of that,” Ms. Wang said, except more shares in the heart rhythm management sector. Also, regulators would probably take issue with it, she added.

Driving the Guidant acquisition were two companies looking to expand their portfolio with the lucrative heart rhythm management space. Boston Scientific and J&J were not looking to bulk up on what they already had.

Other companies could follow suit and try to break into the industry via an acquisition, Frost & Sullivan’s Mr. Rajan said. But they would have to come with a high-limit checkbook, like the one Boston Scientific ultimately agreed to whip out.

“If someone buys into the space it would have to be a big company, like J&J,” Mr. Rajan said.