Smith & Nephew, Biomet Acknowledge Merger Talk

The orthopedics sector may be headed for further consolidation. Earlier this month, Biomet Inc. (Warsaw, IN) acknowledged discussions with Smith & Nephew plc (London) concerning a possible merger.

Rumors of a merger came as little surprise to most industry analysts. Last April, following the sudden resignation of its long-time president and CEO, Dane Miller, Biomet announced that it had engaged the services of Morgan Stanley & Co. (New York City) to explore strategic alternatives focused on enhancing shareholder value.

As industry talk of a potential deal began to heat up, however, both companies issued statements that seemed to throw cold water on any such speculation—at least for the near term.

Biomet's interim president and CEO, Daniel P. Hann, said that the company “has not made a determination that it is in its best interests . . . to engage in a transaction with any third party.”

In the past, Smith & Nephew CEO Christopher O'Donnell has said, “Everybody would view Biomet as an innovator in the orthopedic space.” However, the company sought to downplay the significance of its merger discussions. In a statement, Smith & Nephew said that it would not provide further comment on the issue until or unless there is additional information to report. Biomet has issued a similar statement.

“The deal is pure speculation at this point until one of the companies makes a move or more information is forthcoming,” says Raj Denhoy, vice president and senior medtech research analyst with Piper Jaffray & Co. (Minneapolis). “Smith & Nephew is one of the top performers in the orthopedics sector, and any acquisition it considers would have to make strategic sense. Does simply being a larger company by acquiring Biomet meet that requirement? That's what Smith & Nephew has to determine.”

Some analysts say that acquiring Biomet would put Smith & Nephew in a better position to compete with industry leaders Zimmer Holdings Inc. (Warsaw, IN), Stryker Corp. (Kalamazoo, MI), and Johnson & Johnson's DePuy Orthopaedics Inc. (Warsaw, IN). Other analysts remain concerned about overlapping product lines and sales force integration issues.

Both Smith & Nephew and Biomet currently have market valuations of about $9.2 billion, and many industry observers say Biomet would fetch a price of at least $10 billion. Although private equity firms have reportedly expressed interest in Biomet, Smith & Nephew's acknowledgement of merger talks could cause other orthopedics firms to evaluate Biomet as an acquisition target. Analysts point out that the interest of multiple suitors could result in a bidding war similar to the 2003 struggle for Centerpulse, in which Smith & Nephew lost to Zimmer.

Although Biomet's sales were up 5% in its most recent quarter, the company is widely regarded as an underperformer in the orthopedics space. Some analysts say the company's saving grace is that orthopedic surgeons seem to hold the company in high regard. Biomet is still under investigation by the U.S. Department of Justice regarding possible antitrust violations. However, because the other leading U.S. orthopedics firms are part of the same inquiry, the issue is not expected to significantly influence any merger talks.

With more than 6000 employees, Biomet reported annual sales of $2.03 billion for the 12-month period ending May 31, 2006. The figured represented a 7% increase over the previous year.

Smith & Nephew has more than 8500 employees and reported sales of $2.55 billion for the year ending on December 31, 2005. Based on sales from all product sectors, the figure represented an increase of 11% over the previous year. The company's orthopedics division reported year-over-year growth of 15% for the same period.

© 2006 Canon Communications LLC

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