Stryker CEO Refutes S&N Purchase, Sort Of

Stryker Corporation is evaluating a purchase of Smith & Nephew plc (S&N). However, in response to a United Kingdom regulator request to declare the company’s intentions, Kevin Lobo, Stryker’s CEO, said there would be no bid for the company…today.

Lobo even went on Fox Business News on May 28, 2014 to confirm that the company had no intention of acquiring (S&N)…for at least six months.

Traders Gone Wild

Lobo was responding to traders gone wild on the London Stock Exchange after a story in the Financial Times reported that Stryker was evaluating a takeover of S&N. That caused the UK Takeover Panel to contact Stryker.

“We confirmed we do not intend to make an offer for S&N. We were in preliminary evaluations about considering a transaction, ” said Lobo. “For the next six months we are not in a position to make an offer.” Under the UK Takeover Code, Stryker is not permitted to announce an offer or possible offer for S&N or make any statement that raises the possibility that such an offer might be made for six months, unless a third party steps in to announce their intention to acquire S&N.

Ortho Musical Chairs

Lobo cited the Zimmer/Biomet deal as evidence of consolidation in an industry that has been growing slowly over the last four to five years. He pointed out that we will now be down to only four large hip and knee makers after the Zimmer/Biomet deal is completed.

Asked about the $4 billion burning a hole in his pocket, Lobo told Fox that mergers and acquisitions remain the company’s top priority, noting that he’s engineered five acquisitions since he took over from Stephen MacMillan 18 months ago. He highlighted the deal in China with Trauson Holding Limited for low cost orthopedics and MAKO Surgical on the high-tech end.

What If…

Wells Fargo analyst Larry Biegelsen stated in an investor note that he thinks that an acquisition of S&N by Stryker would, “make strategic sense, given the recently announced Zimmer/Biomet transaction and the speculation of further consolidation in the orthopedic industry. The combined Stryker and S&N would have over 30% market share of the hip and knee markets, second only to the combined Zimmer/Biomet.” Given that Stryker was only at an early stage of evaluating a takeover of S&N, Biegelsen said he would not be surprised to see Stryker eventually bid on S&N.

Big Three

Glenn Novarro of RBC Capital Markets also did not rule out an eventual deal. He said acquiring S&N would give Stryker more recon scale, particularly in international markets and leave Johnson & Johnson’s DePuy Synthes a distant third. A new Big Three would share 98% of the market with Zimmer/Biomet at 40%, Stryker/S&N at 34% and DePuy Synthes with 24%.

Additionally, says Novarro, a deal would increase Stryker’s international recon presence as only approximately 39% of the company’s recon sales are from international markets (vs. approximately 54% for S&N). A deal would also help Stryker with institutional purchasers and lead to more stable longer-term recon implant pricing as only three competitors share the market.

Stryker would also get a bigger presence in trauma, sport medicine and advanced wound management, which is a $6 billion global market and growing at about 4% per year.

Stryker may be prohibited from talking about a deal for the next six months, but the company is not prohibited from continuing to talk to S&N about becoming number three in orthopedics. Stay tuned.