S&N falls on Stryker buyback plan, buys into Latin American distributor

Smith & Nephew ($SNN) was down 8% on the March 3 news that Stryker ($SYK) now has a massive $2.6 billion authorization available for share repurchases. That's a significant shift in strategy for Stryker, which has been highly acquisitive in the last few years and has long been rumored as a potential buyer for Smith & Nephew.

Stryker had strikingly different priorities in 2014, when it spent $916 million of its cash on acquisitions, $462 million on dividends and a mere $100 million for share repurchases. Even more went to acquisitions in 2013, when it spent $2.3 billion--most of which went to buy Mako Surgical.

But now S&N investors have taken out almost all the acquisition premium that they so eagerly pumped into the stock in late May. Its share price has deflated to about $34; prior to the Stryker rumors it was at around $31. S&N climbed as high as about $40 on the expectations that Stryker would buy its orthopedics rival.

Stryker CEO Kevin Lobo

Stryker has relied heavily on an aggressive acquisition strategy to drive growth over the last few years. Chairman and CEO Kevin Lobo tried to allay any potential investor fears that the growth achieved through new acquisitions will grind to a halt.

"While M&A activity across the breadth of our product and service offerings will remain the primary focus of our long-term growth strategy, this new authorization recognizes that the strength of our balance sheet is sufficient to enable more significant share repurchases," Lobo said in a statement about the new repurchase authorization.

But it's tough to see how Stryker would have sufficient cash to fund both an acquisition of S&N and $2.6 billion in buybacks. At year end, Stryker had $1.8 billion in cash and another $3.2 billion in marketable securities. But it also had $3.2 billion in long-term debt.

S&N isn't holding its breath for a deal; in fact, it's the one doing the buying this time around. It acquired Columbian medical technology distributor EuroCiencia Colombia (ECC) for an undisclosed sum.

S&N CEO Olivier Bohuon

"ECC provides us with an established, successful platform to accelerate growth in Colombia, one of the largest economies in Latin America," S&N CEO Olivier Bohuon said in a statement. "With increased resources and direct relationships with customers we are better able to fulfill their needs, through our pioneering technologies and enhanced service."

Last year, S&N had strong revenue growth in emerging markets, with China being a top performer. In 2015, it expects comparable outcomes--with an even greater showing from Latin America.

S&N CFO Julie Brown said in February, "In emerging markets, we continue to perform strongly, delivering 17% revenue growth in 2014, with our performance in China again being the highlight. In 2015, I expect a similarly strong performance. This will be driven by our existing premium-tier business, including a greater contribution from Latin America, particularly in Brazil."

The company expects to make additional, similar acquisitions in emerging markets, particularly Brazil, Turkey and India. Emerging markets accounted for 15% of its $4.6 billion in 2014 revenue. In 2013, it also acquired a distributor in Brazil.

- here is the S&N release on ECC
- and here's a Reuters article on diminished investor expectations for a Stryker buy of S&N

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