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Loss of Guidant Could Spawn Bigger, Better Things

Original article
Pumping new life into mature humans is the chief business of Indiana’s Guidant Corp. But what happens when Indiana loses one of its six Fortune 500 companies to acquisition by giant Johnson & Johnson and Guidant is no more? Will the Indiana economy quiver? Will our life science ambitions stop churning? Will 170 careers be blocked?

Many believe Indiana is a big loser in this deal. But in a systolic capitalist economy of constant motion, the Guidant sale is a monumental boon for the state.

Part of the upside is easy to measure. In just the last few months, as rumors of a deal intensified, the market value of Guidant increased by some $7 billion. If the deal with J&J is consummated, the rise will total $9.4 billion. Since Guidant’s public birthday 10 years ago, its shares have jumped 20-fold, from $3.62 to $72. Guidant executives, employees and shareholders will share in this wealth they created.

The indirect effects of the sale, however, could be far larger. Over the past 10 years, Guidant has attracted and trained some of the state’s best executives and bio-technical talent. They have built a world-class company and obtained unrivaled experience. We don’t yet know their fate. But in one possible scenario, many of them will now be freed, some flush with cash from the buyout, to pursue new ventures. One life science company could turn into 10. One-hundred-seventy jobs could turn into tens of thousands of new jobs. Other loyal Guidant investors can now redeploy their capital, once again seeking returns like the 20-fold rise they enjoyed with Guidant. Unless all these executives and local investors retire to La Jolla or St. Bart’s, taking their money and brains with them, this is surely good news for the state.

The alternative to systolic capitalism is economic arrest. States and nations that resist change usually change for the worse. Today Western Europe struggles to keep the wealth it has built up over the last 500 years when it utterly dominated science, discovery and global commerce. Strict labor laws seek to protect jobs. Anti-competition codes protect existing businesses. High tax rates protect the existing rich from those who want to get rich. But a focus on protecting what you’ve got usually leads to decline. The American economy loses more jobs per capita annually than any nation in the world. But we also produce more new jobs per capita. Over the last 10 years, America lost 15 million jobs annually. But each year we created more than 17 million jobs. Because our friends across the pond do not tolerate such volatility, mature Europe grows less than half as fast as the U.S., unemployment is twice the U.S., and capital, companies and talent are fleeing to Asia.

Europe’s fear of the future severely depresses asset values. The U.S., for example, has only a slightly larger gross domestic product than the 15 “OECD” European nations. But the market capitalization of U.S. companies is double that of European companies. Every dollar of goods and services produced in the U.S. thus yields securitized asset values more than two-thirds higher than goods and services produced in Europe. As the mercantilists and bullionists learned centuries ago, hoarding riches can diminish wealth.

Economies grow through the dispersal of information. Soviet Russia had hundreds of thousands of highly educated and brilliant scientists, but because they were buried in bureaucracy and could not share information with each other or the outside world, they were mostly ineffective. Their economy collapsed.

America’s symbol of dynamism and success, Silicon Valley, was built by independent minds and disgruntled mavericks. Never-ending are its mergers, buyouts, spinoffs, spectacular failures and even more spectacular redemptions. Entrepreneurs create wealth, realize that wealth when someone pays them for it, and then use what they’ve learned to build something even bigger and better. Protecting the past is not high on their list. Guidant employees can similarly take pride in their creation, but the biggest and best things will likely come to those who move out and up.

If Indiana focuses on keeping our six existing Fortune 500 headquarters here, we can probably achieve that goal. But at the cost of someday boasting 10 or 20 Fortune 500 headquarters.

Federal regulators now scrutinizing the potentially “anti-competitive” implications of the Guidant-J&J merger display a similarly static view of the world. The theory is that Guidant and J&J could corner the existing market for life-saving vascular stints. Never mind that the combined expertise of the two companies could offer a superior vascular solution to millions of patients via J&J’s top drug-coated stent and Guidant’s world-leading insertion mechanism. Some would rather promote competition in the abstract than allow businesses to find the best ways to save dying customers. In the name of ever-arbitrary “anti-trust,” these lawyers attempt to micromanage business decisions using a snapshot of a dynamic cardiac market that will look far different mere months from now. Likewise, Indiana must not take a snapshot view of our economy but exploit the changes with creativity and faith in the future.

In our hearts, we all would like to protect Guidant as a symbol of Hoosier success. I have several wonderful neighbors who could be affected by this deal. Corporate mergers, shifts and layoffs surely create anxiety and temporary hardship. Johnson & Johnson would be lucky to keep my friends, but knowing their talent and hard work, it is likely they could contribute even more to the state as leaders in new enterprises, spinning out their financial knowledge and life-science experience across the Hoosier economy.

Guidant has become a mature and revered company, and through its acquisition the Indiana economy is likely not to quit but to pulse with new life.

Swanson, a resident of Zionsville, is executive editor of the Gilder Technology Report and a senior fellow at the Discovery Institute.

Bret Swanson

Bret Swanson is a Senior Fellow at Seattle's Discovery Institute, where he researches technology and economics and contributes to the Disco-Tech blog. He is currently writing a book on the abundance of the world economy, focusing on the Chinese boom and developing a new concept linking economics and information theory. Swanson writes frequently for the editorial page of The Wall Street Journal on topics ranging from broadband communications to monetary policy.