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Smith & Nephew and Biomet merger talks break down

Merger talks between US medical devices company, Smith & Nephew and Biomet have broken down, with the latter company accepting a rival bid from a private equity consortium

Merger talks between US medical devices company, Smith & Nephew (S&N) and Biomet have broken down, with the latter company accepting a rival bid from a private equity consortium.

The failure to secure terms echoes a similar situation three years ago, when S&N sought to improve its scale through a foreign acquisition. S&N's $1.5 billion bid for Swiss Centerpulse fell through, beaten by rival bidder, Zimmer.

The talks between S&N and Biomet have been going on since the end of October 2006. Media reports have suggested that potential accounting errors at Biomet had initiated the breakdown. Also, the practice of backdating stock options was questioned. Biomet has formed a special committee to carry out an internal investigation.

Analysts see S&N's failure as a failed last chance to make it big. The company claimed it had made a competitive bid for Biomet, which promptly accepted an alternative cash bid of $10.9 billion (£5.6 billion) from a private equity consortium made up of Blackstone, Goldman Sachs, Kohlberg Kravis Roberts and TPG.

S&N's failure to secure a merger offer signals the likelihood of a hostile takeover bid by a private equity firm or trade buyer. Analysts have revealed that the bid could come from one of the top three sector operators: Johnson & Johnson, Stryker or Zimmer. Other possible buyers could include US medical devices manufacturer, Medtronic, as well as pharmaceutical major, Abbott.

Even though the Biomet deal came with risks, it was vital for S&N to scale up in order to compete in this maturing sector. A successful result would have created an orthopaedic specialist company with over 20 per cent of the US hip and knee replacement market, as well as creating a scale competitor to sector leaders.

In order to control the damage, an S&N spokesperson insisted that the company was still strongly positioned as an independent manufacturer of medical devices and expected to grow through acquisitions and new product launches.

Currently, half of S&N's revenue comes from its orthopaedic business, while half of all sales are US-based. As a result of the increasing proportion of old people in the global population, the entire hip and knee replacement market is rising at six per cent a year.

30th September 2008

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