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Avoid Complexity Costs in Contract Negotiations

            A contingent approach on a Contract negotiation requires that both parties remain diligent with one another. This is based on the premise that both sides have an ongoing relationship with each other. A great example of this was the on-again off-again contract between Guidant and Johnson & Johnson in 2004. During the final months of the contract negotiations Guidant had a recall on some of their heart defibrillators during the approval process where Johnson & Johnson were going to buy the company at $74 a share. As soon as the news spread of the defibrillators, Guidant demanded that Johnson & Johnson still close on the prior contract and that the government recall was not a large issue. Johnson & Johnson interpreted this problem as a serious threat to the company and demanded the original offer be brought off the table. Rather than completing a Contingent Value Right between the two companies which would have tracked the values of the recalled medical devices, both companies renegotiated an offer of $63 a share. This was approximately 4 billion dollars less than the original agreement. It would be in the aftermath that Guidant would be purchased by Boston Scientific in a competitive bidding war against Johnson & Johnson. “A contingent contract requires an ongoing relationship between the parties to determine what payoffs if any, are required down the road. This may create costs for one or both sides.” (Subramanian, 2006)