Smith & Nephew yesterday conceded defeat in its battle to take control of Centerpulse, the Swiss manufacturer of artificial hips, knees and screw-in teeth.
The FTSE 100 healthcare company decided it would be too costly to come back with an improved offer, after having been trumped by a £1.9bn bid from the US group Zimmer. S&N's board voted against plans for a £2.02bn offer.
Sir Christopher O'Donnell, S&N chief executive, said that the company would revert to its previous strategy of bolt-on and technology acquisitions.
He said: "The fundamental issue is value. There would be value transfer to the Centerpulse shareholders and the returns to S&N shareholders would be diminished or delayed."
S&N shares enjoyed a relief rally as it became clear the company would not be issuing new paper to fund an increased bid. The stock has been depressed as the company struggled to find ways of matching Zimmer's offer. Last night it closed up more than 6 per cent at 399.25p, its highest level since Zimmer gate-crashed the agreed merger deal in May.
There was also speculation yesterday that the collapse of the Centerpulse strategy left S&N vulnerable to a bid itself.
Analysts pointed to other mid-tier orthopaedics companies, including Biomet of the US, and to the medical devices company Medtronic as being likely to pass the slide rule over S&N. Sir Christopher insisted the group had an independent future. "This is not an industry driven by consolidation, it is a growth industry and the prizes go to those companies who can grow consistently and strongly. We introduce more technology than anybody else and I am very confident in our ability to keep growing the business with mid-teens earnings growth."
Zimmer's victory creates a £8bn global giant that will vie with Johnson & Johnson and Stryker for the number one position in orthopaedics. S&N is the number six player.
Centerpulse's chief executive, Max Link, held a board meeting of the Swiss company today, although it is still unclear whether he will formally recommend the Zimmer offer.
S&N said it had racked up fees "somewhere north of £20m" as a result of the abortive bid, even after accounting for the £9m "break fee" payable because the merger agreed in March will not now proceed.
The Swiss takeover board ruled on Tuesday that there would be no changes to the existing bid timetable. S&N had complained that the timetable favoured Zimmer since the US firm needed less time to get approval from its shareholders.
THE WIT OF O'DONNELL
"This deal transforms the scale of our orthopaedics business. We now become the world's third-biggest player. There is a lot of value to be unlocked from this deal."
20 March, 2003:
"Zimmer is trying to turn itself into an international company run out of Warsaw, Indiana. Most people would ask, where is Warsaw, Indiana? It is not even a significant city."
20 June, 2003:
"Was this a 'must do'? No. Was it a 'like to do'. Yes. Have we done it? No, so we'll go and do something else."
6 August, 2003: