Investing

Smith & Nephew Becomes Worth an Arm and a Leg in M&A (SNN, JNJ, ZMH, SYK, MDT)

Smith & Nephew plc (NYSE: SNN) is trading higher today on reports that it rebuffed an approach for a takeover by Johnson & Johnson (NYSE: JNJ).  What is interesting about the implied $10.9 billion, or 750 pence per share in London, was called too low.

If you have been around in the investing world of medical devices for long, Smith & Nephew has has been discussed for some time as a possible buyout target.  S&N is a company in orthopedics, endoscopy, and wound management; but it is perhaps best known for its hip, knee, and shoulder joint replacement systems.

This seems a natural fit into the DePuy unit at J&J.  At issue is that J&J has recall problems in many aspects of its business, including its hip replacement system.  Some have felt that Zimmer Holdings, Inc. (NYSE: ZMH) and Stryker Corp. (NYSE: SYK) could be acquirers to enhance their joint replacement offerings.  The problem with Zimmer is that it would be closer to a merger of equals.  Stryker is worth more than twice S&N by market cap.  Medtronic, Inc. (NYSE: MDT) is another name that could be considered a possible player if it were to choose to.  With a $39 billion market cap it has the chips to play if it wishes.

The Daily Mail reported over a month ago that private equity firms were considering a bid higher than J&J’s 750 pence bid up around 800 pence.  Nothing has come to fruition there and many, including us, wonder if a private equity consortium might do better looking elsewhere to spend more than $10 billion in a club deal.  Club deals have fallen by the wayside since the private equity bubble burst, as have deals greater than $10 billion in size.  Biomet was taken private back in 2007 by a private equity consortium for about $11.4 billion.  At issue is this: compare the world of 2007 to the world of 2011, even for billionaires wanting to buy companies.

It seems now that the question is not whether S&N would make an attractive target.  The question seems to boil down to price.  Nearing $11 billion is getting up there for the upper limits of new deals for private companies and public companies alike.  S&N’s management maintains that it is undervaluing the company.  S&N’s ADRs are up almost 11% at $56.39 on Monday and its year high is now $56.80 from this morning.  This one traded above $60 in ADR terms back in 2007 and 2008 before the market went south.

They say that ‘Beauty is in the Eye of the Beholder.’  It just depends upon how much the beholder sees as the crossing-point where value becomes fully-priced.

JON C. OGG