Ever since Zimmer ($ZBH) agreed to purchase Biomet for $13.4 billion in April 2014, the wait for the takeover of Smith & Nephew ($SNN) has been on, with Stryker ($SYK) being the most likely acquirer. After all, the British company is the only midsized player left in the orthopedics sector, which is dominated by three bigwigs: Zimmer Biomet, Stryker, and Johnson & Johnson's DePuy.
Rumors of an impending deal were just renewed by a StreetInsider report that Stryker has put an $18 billion offer for Smith & Nephew on the table, sending its stock up as much as 6%. According to the article's unnamed source, "Goldman Sachs is acting as adviser, and deal talks could move quickly."
Caveat: Similar rumors were reported by Bloomberg and the Financial Times following news of the 2014 Zimmer Biomet transaction, but the companies' flirtations did not lead to a union, perhaps due to the rise of S&N's stock price in anticipation of a deal. Even Medtronic (whose orthopedics presence is limited to spinal implants) reportedly considered making a bid on the only company in the artificial hip and knee sector large enough "to move the dial" but small enough to be taken over by one of the industry's top dogs.
The logic behind a consolidation between Stryker and Smith & Nephew is clear. It's the same reason Zimmer and Biomet joined forces. Consolidated hospitals are buying at greater scale to improve leverage in contract negotiations, thereby securing lower prices for orthopedic implants. With that goal in mind, purchasers are also buying implants from fewer companies so that they can buy in greater bulk from the suppliers that they retain.
Following the Zimmer Biomet deal, Michael Orsinger, chairman of Johnson & Johnson's ($JNJ) DePuy orthopedics unit, said that "the shifting landscape may lead J&J to accept "a slightly lower margin, but compensated by larger volume."
All of the players are subject to the same market forces. Consolidation would certainly enable Stryker and Smith & Nephew to sell in greater bulk, and would also help protect margins by improving leverage during negotiations with hospitals over bulk purchase contracts.
As artificial hips and knees are fairly mature markets, it's tough for the companies to differentiate themselves based on innovation, making pricing pressure all the more acute.
Given the companies' history of failed courtship, the latest rumor is far from a guarantee of impending M&A activity. And the pesky U.K. Takeover Code could come into play. If Stryker were to publicly deny interest in Smith & Nephew, it would be barred from making another offer within 6 months in most circumstances, but not if a rival company announces a firm intention to make an offer for Smith & Nephew.
The two companies have been pursuing divergent sales models, with Stryker emphasizing its large, specialized sales force, and S&N piloting a rep-less sales model in a bid to costs.
- read the rumor reported by StreetInsider