Can You Smell a Bidding War Brewing Over Boston Scientific?

If Stryker is, in fact, making a play for Boston Scientific, will Johnson & Johnson enter the fray if a bidding war emerges? Analysts say the chances are pretty good.

Monday's headlines that Stryker may be making a play for Boston Scientific prompted industry analysts to play the "what if" game, dissecting potential benefits of such a marriage, how a deal of that size might impact the broader medical device industry, and the potential of other bidders to emerge.

Just to be clear though, we still do not know at this point if Stryker really has approached Boston Scientific about a potential takeover, or if Boston Scientific is even receptive to the idea. Both companies declined to comment on the speculation Monday, citing their respective company policies.

Canaccord Genuity's Jason Mills and Kyle Rose are among the medtech analysts who predicted that if Stryker is, in fact, making a bid on Boston Scientific, there is a good chance that other bidders will emerge, namely, Johnson & Johnson.

J&J has been "bantered about" as a potential Boston Scientific acquirer for years, Mills and Rose noted in their report Tuesday. "If a bidding war emerges, we'd place a high likelihood on [J&J] being involved."

Needham & Company's Mike Matson also mentioned the likelihood of J&J serving up a competitive bid because its medical device business has been underperforming peers and also fits well with Boston Scientific.

Would a Stryker-Boston Scientific Merger Be Good for Medtech?

Mills and Rose also put forth some ideas regarding what a deal of this size might mean for the industry. For one thing, they pointed out, the deal would effectively be more of a merger of equals, as Stryker is only about one third larger than Boston Scientific.

"Hypothetically, this would create an industry powerhouse ..." the analysts wrote, adding that the combined company would join the likes of just a few others – Medtronic, Abbot, and J&J, although they also noted that J&J has done more deals in pharma than medtech in recent years.

Speaking of Johnson & Johnson, the Canaccord analysts said a Stryker-Boston Scientific merger could make J&J more inclined to refocus back on medtech now, and they went so far as to note a handful of potential J&J targets: Edwards Lifesciences, Penumbra, Nevro, iRhythm Technologies, and LivaNova.

The deal also would make Smith & Nephew the last remaining "pure play" total joint option on the market for any companies looking to round out a product portfolio to include orthopedics, Mills and Rose said.

While the deal could more M&A activity for larger targets, the analysts said it could also slow down M&A activity in the near term as it relates to larger companies doing smaller tuck-in deals.

Mills and Rose also speculated that a deal between Stryker and Boston Scientific (or any medtech deal of such magnitude) may actually have an indirect, positive impact on the industry's IPO market, perhaps driving more of the current, attractive, already-scaled private companies to offer shares to institutional investors over the next year or so rather than holding out for a bid from the likes of Stryker and/or Boston Scientific.

But Would It Be a Win-Win for Stryker and Boston Scientific?

There is very little revenue overlap between the two, the Canaccord analysts said, and acquiring Boston Scientific would give Stryker differentiated, high-growth products like the Watchman and Emblem S-ICD. Perhaps most attractive for Stryker, according to Mills and Rose, is that the combined company would possess the scale necessary to compete from a multi-line perspective across hospitals in a way that would only be comparable to Medtronic and J&J in the value-based care era.

From Boston Scientific's perspective, the Canaccord analysts pointed to several reasons the deal makes sense and comes at an opportune time. Boston Scientific shares are up roughly 260% since CEO Mike Mahoney took the helm in late 2012, they noted. 

"By securing a take-out here, management would cap off what has been a stellar five-plus year turnaround and end on a high note rather than having to face any number of potential macroeconomic factors or unknown product/sector issues down the road," the analysts wrote. "In sum, we definitively think [Boston Scientific] is game to do a fair deal here."

Needham & Co.'s analyst agreed that there is little product overlap, but that means revenue synergies may be limited, he noted.

"Each company has a very different focus with different call points; [Boston Scientific] is primarily a cardiovascular company while [Stryker] is primarily an orthopedics company," Matson said.

Both companies have endoscopy businesses, but Stryker's endoscopy business is more focused on capital equipment, arthroscopy, and laparoscopic surgery while Boston Scientific's is more focused on gastrointestinal procedures.

Matson said the negatives of the deal outweigh the positives. Those downsides include significant integration risks, a large increase in Stryker's leverage ratio, and a near-term reduction in Stryker's return on invested capital.

"We're not big fans of this acquisition from [Stryker's] perspective," he said.

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