Will Medtronic Buy Smith & Nephew? 8 Things to Know

Spinal Tech

Rumors run freely today about whether Medtronic will purchase Smith & Nephew after Bloomberg reported late last night the device company giant Medtronic is eyeing Smith & Nephew, which yesterday completed its $1.5 billion acquisition of ArthroCare.

Consolidation has run wild in the orthopedics and spine device industry this year; already Zimmer acquired Biomet for $13.4 billion only months after Biomet announced an initial public offering. Other recent device company acquisitions include Stryker's acquisition of Memomental, Wright Medical's acquisition of Solana, Tornier's acquisition of Orthohelix and Integra LifeScience's acquisition of Ascension Orthopedics.


Medtronic is considered a huge player in the orthopedics and spine markets, and recently has ramped up its presence in the cardiovascular space as well; Smith & Nephew also has a large presence in the orthopedics market and could greatly expand Medtronic's offerings. But would the purchase be a good move? Does it actually have a chance to go through? What would the acquisition mean for the growing orthopedics and spine device market?


Here are eight things to know:


1. Smith & Nephew generates around $4.4 billion in annual revenue, according to a report in the Minneapolis/St. Paul Business Journal. Stryker confirmed interest in acquiring Smith & Nephew last week, but the Bloomberg report cited Medtronic as a "more serious bidder."


2. Smith & Nephew's market cap is around $16 billion, according to various reports. "There would be a solid strategic rationale for a deal with either company, but given Smith & Nephew's impressive development under Oliver Bohuon, a material premium would need to be offered by any potential bidder," said Edison Investment Research Analyst Mick Cooper.


However, Coutts reported Stryker is not ready to commit to an offer and "was forced to rule itself out in a statement to the U.K. Takeover Panel." Stryker's shares were up slightly after news of Medtronic's interest became public.


3. If the acquisition took place, either Medtronic or Stryker could move its legal headquarters to the United Kingdom — where Smith & Nephew is based — giving Medtronic better access to overseas cash, stated the Journal report, and impact the company's tax rate if its legal address is relocated overseas.


Recently, Pfizer sought to lower its tax rate by purchasing the U.K.-based AstraZeneca. "The benefits of tax inversion appear to be a key driver of the apparent interest in Smith & Nephew by Medtronic and Stryker, as it was for Pfizer with AstraZeneca," said Mr. Cooper. However, an RBC Capital Markets analyst said the move wouldn't significantly impact Medtronic's tax rate, according to the MarketWatch blog.


4. There aren't meaningful overlaps between Smith & Nephew and Medtronic business portfolios, according to Credit Suisse, which stated, "Strategically, a take-out would not result in significant operational cost synergies, except for in administration," according to the Coutts report.


5. The acquisition could fill Medtronic's gaps in trauma and sports medicine, but the company's presence in joint reconstruction would still be modest. The company's fourth quarter earnings for the 2014 fiscal year were down from $969 million in 2013 to $448 million in 2014. Full year net earnings dropped from $2.5 billion in 2013 to $3.1 billion in 2014.


"There are tremendous opportunities ahead as we transform Medtronic from being primarily a device provider today into a premier global medical technology solutions partner tomorrow," said Medtronic CEO Omar Ishrak in the company's financial report, noting confidence in the company's ability to drive more value into their systems. "We remain focused on delivering consistent and dependable growth across all of our businesses through our three growth vectors: new therapies, emerging markets and independent services and solutions."


6. Medtronic stock shot up 3.7 percent to $63.27 after the Bloomberg report on the possible acquisition was released, according to a report from TheStreet. While the company hasn't finalized an offer, Medtronic is doing the "prep" work for a potential deal. TheStreet ratings team rated Medtronic as "Buy" with a ratings score of "A."


"This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate," said TheStreet rating team. "The company's strengths can be seen in multiple areas, such as its revenue growth, reasonable valuation levels, good cash flow from operations, largely solid financial position with reasonable debt levels by most measures and solid stock price performance. We feel these strengths outweigh the fact that the company has had sub par growth in net income."


7. Smith & Nephew shares jumped more than 12 percent after the Bloomberg report was released to $97.27. A week ago, the stock was just above $80, according to a MarketWatch blog report.


8. Medtronic's recent legal woes in the United States are numerous. This year the company announced a $22M settlement related to the Infuse spine surgery product liability claims; paid the government $9.9 million to settle allegations of physician kickbacks to implant pacemakers and defibrillators; and earlier this week Humana announced a lawsuit against the company related to alleged inappropriate Infuse promotions.


More Articles on Spine Devices:
Latin American MIS Spine Implant Market: 5 Things to Know
Humana Sues Medtronic Over Infuse Promotions—5 Things to Know
5 Key Spine, Orthopedic Device Market Updates

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