Stryker denies interest in Smith & Nephew, but leaves the door open to a deal

Stryker ($SYK) denied a Wednesday story in the Financial Times saying that it was preparing to make a bid for orthopedics rival Smith & Nephew ($SNN), but cited a section of the takeover code which would allow it to make an offer within 6 months.

"At the request of the U.K. Takeover Panel, Stryker confirms that it does not intend to make an offer for Smith & Nephew. Accordingly, Stryker is bound by the restrictions under Rule 2.8 of the UK Takeover Code," the company said in a statement.

Crucially, the company is not restricted from making an offer for the next 6 months because of a note to Rule 2.8 in the Takeover Code which states that a statement (such as Stryker's denial) may be set aside when "a third party announces a firm intention to make an offer for the offeree company."

Stryker said as much in its statement, adding that it reserves the right to "announce or participate in an offer or possible offer for Smith & Nephew and/or to take any other action which would otherwise be restricted under Rule 2.8 of the Code within 6 months after the date of this announcement in the circumstances described in note 2 to Rule 2.8 of the Code."

Thus, the possibility of a deal is not closed.

While the Financial Times report specifying the two companies came as a surprise, more consolidation in the orthopedics industry should not. Zimmer's ($ZMH) pending acquisition of Biomet could set off a chain reaction of transactions in the industry. In fact, Johnson & Johnson ($JNJ) officials recently predicted that more consolidation would follow due to an increased emphasis on volume as opposed to margins and shifting dynamics in the hospital industry. Under pressure to cut costs, hospitals are increasingly buying just a few different models of implants for any particular surgery, they said.

Another attraction could be Smith & Nephews' lower U.K. corporate tax rate. An acquirer could then domicile itself in the U.K. so that the entire entity benefits, Bloomberg said. That was one of the justifications cited by Pfizer ($PFE) in its failed bid for AstraZeneca ($AZN).

Smith & Nephew's stock price rose 16% on the London Stock Exchange when the Financial Times story broke, but fell sharply upon the denial. At midday it trades at £986, up 3.5%. It rose by a similar amount on the New York Stock Exchange, where it trades for about $83. Meanwhile, Stryker's stock is up almost 3% on the NYSE to about $83.

- read Stryker's statement
- Bloomberg's article about the denial
- the original Financial Times story (sub. req.)