What the $1.4B K2M acquisition could do for Stryker

Spinal Tech

After the news broke Aug. 30 that Stryker aims to acquire K2M for $1.4 billion, the price of K2M stock rocketed to a record high, according to Investors.com.

 

Shares jumped 26 percent to $27.50, while Stryker's price dropped 1.3 percent to $169.02. In its financial report for the second quarter of 2018, Stryker reported $3.3 billion in net sales, with the orthopedic segment's sales increasing 7.6 percent. Spine and neurotechnology sales were up 19.4 percent to $600 million.

Prior to the news, K2M had a market cap of $938 million; by mid-day Aug. 30, it's market cap was $1.2 billion. By 1 p.m. Aug. 31, the company's market cap leveled a bit to $948.17 million.

The K2M platform will add complex spine solutions to Stryker's spine portfolio, which currently includes cervical fixation, spine navigation, interbody devices and vertebral compression fracture solutions. Spine has been a challenging market for Stryker, however, as noted by Vice President of Strategy and Investor Relations Katherine Owens during the second quarter conference call.

"[The spine market] remains a tough market. It has been challenging for the market overall," she said. "But it's a market we are overall 100 percent committed to. It is the largest market in orthopedics. There is a tremendous unmet need. And we have the benefit given our size and diversity of our product portfolio that we can weather through when the certain business is challenged as spine has been…We do need to continue and we are with allocating more R&D dollars that continue to refresh our portfolio."

With its acquisition of K2M, Stryker added a spine business with sales of nearly $300 million annually. The fast-growing K2M has had a double-digit compounded annual growth rate over the past five years.

Vijay Kumar, an analyst with Evercore, told Invester.com Evercore is expecting the acquisition to deliver low- to mid-single digit growth for Stryker's spine segment when the deal annualizes. By the fourth year, Mr. Kumar estimated a high single-digit return on investment.

He told Investor.com that "there was nervousness" that Stryker considered separating from its tuck-in strategy. "The K2M deal should provide confidence in Stryker sticking to its well-oiled strategy of tuck-in acquisitions that are accretive to (the top line) and margins."

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