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Smith & Nephew and Plus Orthopedics: A Deal Drawn to Scale

Smith & Nephew announced that it will buy privately-held Swiss company Plus Orthopedics. The acquisition gives Smith & Nephew a 12% global market share in the total reconstruction market, bumping it up to the global number-four position. S&N officials say the deal is about scale; the combination offers manufacturing leverage, including improved capacity utilization and improvements in the costs of goods. The merged companies also expect to leverage combined sales and marketing capabilities and look for an increase in sales resulting from putting S&N products through Plus sales channels-and vice versa. Some analysts have insisted that the Plus deal is about scale--but they're referring to the bulk that's required for Smith & Nephew to remain independent. S&N has been rumored to be a takeover candidate itself, in an industry in which the number of major players has been steadily shrinking due to consolidation.

A flurry of deal activity—which has seen four acquisitions in as many months—is once again raising the question that industry insiders have asked themselves periodically over the past decade: is the orthopedics industry poised for a wave of significant consolidation? (See Exhibit 1.)Smith & Nephew PLC, which was outbid by Zimmer Holdings Inc. in its attempt to acquire European orthopedics firm Centerpulse AG in 2003--and again recently when a consortium of private equity buyers topped its bid for Biomet Inc.--has become the latest acquirer. [See Deal][See Deal] It announced in March that it would buy privately held Swiss company Plus Orthopedics AG . [See Deal] The acquisition gives Smith & Nephew a 12% global market share in the total reconstruction market, bumping it up to the global number-four position after Zimmer, which has a wide lead with 29% of the market, followed by Johnson & Johnson’s DePuy Inc., which holds a 22% share and Stryker Corp., with 20% of the market. With the Plus acquisition, Smith & Nephew moves just ahead of Biomet.

Smith & Nephew will pay $889 million for Plus, including the assumption of debt. The purchase price is approximately three...

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