S&N becomes a bid 'target' after failing to acquire Biomet

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Shares in Smith & Nephew soared yesterday as investors bet the maker of artificial hips and knees would become a takeover target, having failed for the second time to consummate a giant merger.

Sir Christopher O'Donnell, S&N's chief executive, lost out in the auction of its rival Biomet to a consortium of private-equity players, who will pay $10.9bn (£5.6bn) for the US company.

A merger with Biomet would have moved S&N firmly into the top tier of global orthopaedics firms, but the failure to clinch a deal left analysts questioning whether the company has the scale to compete effectively with the biggest US players.

Three years ago, an agreed merger between S&N and Centerpulse was broken up when Zimmer, the world's biggest maker of artificial joints, offered a higher price for the Swiss firm.

The victory of a private-equity bidder for Biomet also underscored the new-found willingness of financial buyers to move into the world of medical technology, whose requirements for constant investment and innovation might previously have put them off.

Seb Jantet, analyst at Investec Securities, said S&N's failure to buy Biomet turned it from "acquirer to target" and a bid could come from private-equity groups who missed out in the Biomet auction. He said: "Having failed to consolidate yet again, S&N has not got a clear strategy.

"Their argument for their two acquisition attempts has been to build scale to compete with Zimmer, Johnson & Johnson and Stryker, and the implication is that without a deal they are likely to stay a second-division player.

"I would think that the underbidders for Biomet - and my guess is that there were other private-equity players interested - might now take a look at S&N, since they would not want to waste their due diligence."

Biomet said yesterday it had agreed a $10.9bn cash bid from a consortium of four private-equity groups - Blackstone, Goldman Sachs, Kohlberg Kravis Roberts and TPG. The consortium will also include Dane Miller, the Biomet founder who was ousted as chief executive in a boardroom coup earlier this year but who remains a folk hero among many staff at the group.

Biomet also warnedit may have to restate its accounts after uncovering evidence that share-option grants were secretly manipulated to inflate executive pay.

S&N shares jumped more than 8 per cent to 521.75p.