Stryker Could Buy Smith & Nephew Later, Not Sooner

The latest round in the spine, hip, and knee segment's M&A dance has ended with Stryker Corp. admitting that it has its eye on Smith & Nephew plc but isn't ready to pop the question yet.

Meanwhile, Zimmer Holdings Inc. and Biomet Inc. are, after their big April announcement, sitting quietly in the corner and planning the merger that will create the company that will take over the No. 2 spot in orthopedic devices from Stryker.

Bloomberg reports that Kevin Lobo, Stryker's CEO, said that his $31 billion company has been evaluating the purchase of London-based Smith & Nephew, worth about $15 billion, which would expand its share of the market for hip and knee replacements. While the deal is on hold for now, Lobo told Fox Business, the company could move forward with the acquisition at a later date.

When news of Stryker's interest was published in London's Financial Times, the spike in the share price of Smith & Nephew was enough to draw the interest of the UK's Takeover Panel, which is the regulatory body that oversees such matters.

"We were evaluating this as a potential transaction," Lobo said. "But based on the price spike in Smith & Nephew, the Takeover Panel called us and we have to make this public statement." After Smith & Nephew's share price jumped nearly 18 percent, Stryker had to make an offer within 28 days or wait six months under UK takeover rules, unless Smith & Nephew's board recommends the deal. If that should happen, the waiting period could be shortened to three months, RBC analyst Glenn Novarro told Bloomberg.

"Zimmer pulled the trigger on one of the two likely takeover candidates, and that somewhat forces Stryker's hand," Mark Landy, an analyst at Summer Street Research in Boston, told Bloomberg in a phone interview. Stryker must be "analyzing the competition from a larger Zimmer, the potential impact of that on its business and what is the right step for them going forward. Stryker is a logical acquirer for Smith & Nephew, which is a good asset that would bring a lot of diversification."

Also speaking on the phone with Bloomberg, Lisa Bedell Clive, a London-based analyst at Sanford C. Bernstein & Co., reportedly said, "The Zimmer-Biomet announcement really changed the game." She continued, "Zimmer has consulted enough antitrust lawyers that they think they can complete the Biomet transaction. That potentially paves the way for Stryker to do the same."

Even after Stryker's denial that it was planning a bid, London traders said the return of takeover speculation would continue to support S&N shares. "There have been bid rumors in Smith & Nephew for ages ... People are buying on the back of that," Mark Ward, head of execution trading at Sanlam Securities, told Reuters.

Still, all this jockeying is just for the right to call themselves Number 2. The top spot is, apparently unassailably, reserved for Johnson & Johnson.

Stephen Levy is a contributor to Qmed and MPMN.