Stryker: We’re Not Buying Smith & Nephew … Yet, But We’re Interested

Officials at Kalamazoo, Mich.-based Stryker Corp. are denying that they are planning a takeover offer for orthopedics rival Smith & Nephew plc.

The rumor initially was published by the United Kingdom’s Financial Times. The news sent Smith & Nephew shares through the roof. The newspaper reported that Stryker had retained investment bankers and was trying to arrange financing for a bid, which drove shares of the London-based company up as much as 18 percent.

The United Kingdom’s Panel on Takeovers and Mergers asked Stryker to clarify its intentions. Stryker’s said that under U.K. rules, the company can’t bid for Smith & Nephew for six months except in certain circumstances.

“At the request of the U.K. Takeover Panel, Stryker confirms that it does not intend to make an offer for Smith & Nephew,” Stryker said in a statement on May 28.

Those requirements still could be met, reviving the deal, said Lisa Bedell Clive, an analyst at Sanford C. Bernstein & Co.

“It does not preclude them from approaching the Smith & Nephew board if the board is willing to engage,” Clive said in a note to clients. “We continue to think that Smith & Nephew remains a viable target for Johnson & Johnson or Stryker as the orthopedic industry enters a new phase of consolidation.”

U.K. rules on takeovers are different and more structured than in the United States, according to Stephen Simpson, CFA, a financial and investment writer. “With its denial, Stryker is basically prohibited from making an unsolicited bid for Smith & Nephew for six months and is reportedly not even supposed to move forward with additional internal due diligence—although how that can be prevented is a completely different subject,” Simpson wrote in a blog on the Motley Fool website. 

There are some exceptions to that six-month ban, Simpson explained. Stryker can make a bid if another company announces a bid for Smith & Nephew and the two companies can announce a friendly mutual deal in three months.

Stryker had been in the early stages of evaluating Smith & Nephew as a takeover tarket, Stryker’s Chief Executive Officer Kevin Lobo confirmed on Fox Business Network. Speculation about the acquisition and the movement of Smith & Nephew’s shares led government officials in London to contact, according to Lobo.

Some industry experts claim that the acquisition would allow Stryker to cut its tax bill by relocating to the United Kingdom., while expanding its portfolio to compete for hospitals’ business with larger rivals including Johnson & Johnson and Medtronic Inc.

The United Kingdom has a corporate tax rate of 21 percent, which is dropping to 20 percent next year, compared with the 35 percent federal rate in the United States, according to a report from Bloomberg News. The United Kingdom generally only taxes profits that companies earn within its borders. The U.S. taxes its companies on profits they earn overseas when they repatriate the money and after credits for foreign taxes. U.S.-based medical device companies also are dealing with a 2.3 percent medical device excise tax.

Even without the tax benefits, Stryker could be looking to grow as the orthopedic market consolidates, analysts said.

Analysts at RBC Capital said that an acquisition of Smith & Nephew by Stryker would be a “near-term negative” for potential extremity buyout targets such as Wright Medical Group Inc. and Tornier, as the list of potential acquirers continues to shrink.

In April, Zimmer Holdings Inc. agreed to acquire Biomet Inc. for $13.4 billion, which puts it ahead of Stryker as the second-largest company in the orthopedic market.