The rise and rise of Gyrus

The £935m takeover of the British medical technology developerby the Japanese giant Olympus has shone the spotlight on anunder-valued sector

On a day when constituents of the FTSE 350 almost universally headed into negative territory, one stock stood out a mile after adding more than 50 per cent in value. The company in question was Gyrus, a medical technology developer, which has agreed to a near-£1bn takeover by the Japanese camera giant Olympus, a surprise deal that slightly tempered the doom and gloom yesterday.

Olympus is one of the world's most high-profile camera manufacturers, famous for the "Who do you think you are – David Bailey?" advertising campaign that ran during the 1970s and 1980s and was recently resurrected to promote its digital range.

However, the Japanese company makes most of its money producing medical instruments such as endoscopes, and with intense competition in the digital camera market suppressing margins, Olympus has snapped up Gyrus to bolster its position in the high-growth surgical market. The cash deal, which has been recommended by the Gyrus management team, is the largest acquisition the Japanese electronics company has ever made.

Analysts were not surprised that Gyrus, a mid-cap medical technology company which has built a leading position in a number of surgical end-markets such as urology and gynaecology, had attracted a bid. Yet the identity of the bidder was a shock, as it had been assumed that the Reading-based company would end up in the hands of one of the US medical device giants, such as Johnson & Johnson or Stryker.

The size of the premium that Olympus has paid for Gyrus also raised eyebrows. At 630p a share, the offer is pitched at a 58 per cent premium to the UK company's closing price on Friday, and 22 per cent higher than the stock's all-time high.

The offer, which values Gyrus at £935m, could be high enough to ward off interest from other bidders, although Paul Cuddon, an analyst at KBC Peel Hunt, said that Johnson & Johnson is unlikely to be comfortable with Olympus entering the market for general electrosurgical devices and may consider a counter-bid. Companies such as Stryker, ValleyLab and Pentax were also seen as possible suitors to rival the Japanese company's ambition. Mr Cudden said that some interested parties may have been surprised by the speed at which Olympus has done the deal, and that until the takeover completes, there is room for further share price upside.

Any rival bid is likely could be complicated by the US regulators, due to the overlap in the major players' operations. The Nomura analyst Michael King said that the likes of Karl Storz, a leading supplier to the urology and gynaecology markets, may be interested in Gyrus, but the overlap may be too great for US regulators. For Olympus, the overlap between the two businesses is not as stark, with the Japanese company strongest in Japan and Europe, while Gyrus has a more dominant position in the US.

The merger of Olympus, a leader in visualisation technology, with the UK company will create a global leader in the "see and treat" market – where one company provides both the imaging and the treatment devices to surgeons – according to Brian Steer, long-serving chairmanof Gyrus.

Olympus said that the combined company will have revenue of around £1.5bn, with Gyrus operating as a standalone division within the Japanese company.

Tsuyoshi Kikukawa, the chairman of Olympus, said: "The operations of Gyrus and Olympus's Medical Systems Business are highly complementary, and I am confident that this planned partnership will generate significant synergies and opportunities for both firms."

Olympus, which is dominant in the gastrointestinal and general endoscope markets, will become the market leader in the gynaecology market in the US, with a 38 per cent market share, and will control roughly half the US urology market.

The bid underlines the success that Gyrus has achieved in building a substantial global player in the keyhole surgery sector, a market that has developed dramatically since the company was founded in 1989.

Gyrus was set up by Mark Goble, a surgeon at Bristol Royal Infirmary, who identified the emerging market for minimalinvasive surgery and thusfounded the company with his brother Colin, an expert in analogue electronics. The brothers developed plasma-based surgical tools that minimised patient trauma during a variety of operations such as prostate surgery and hysterectomies. The technology enables surgeons to cut or vaporise tissue using the plasma, allowing quicker and less painful operations than traditional methods of cutting tissue using scalpels. The technology also automatically seals blood vessels during surgery, which reduces bleeding.

The company listed its shares in 1997, achieving a market valuation of £45m, and has grown steadily ever since, achieving profitability in 2002. It subsequently made a series of transformative acquisitions to apply its technology to new markets such as ear, nose and throat treatment and tonsil reduction to tackle sleep apnea.

In 2005, it doubled its size via the $500m acquisition of American Cytoscope Makers, or ACMI, a deal that significantly strengthened its position in the urology and gynaecology market in the US.

Gyrus celebrated its 10th anniversary as a listed company last week, but the event was slightly soured by a poor performance of its shares over the summer, due mostly to the weak dollar but also to a patent infringement case brought against the company by its US rival ArthroCare. Gyrus derives 80 per cent of its revenue from the US, and has invested in restructuring the business over the past year, moving production to Mexico and shaking up its management team.

Mr Steer, who has spent14 years at Gyrus and took over the running of the companyafterthe departure of Mr Goble to launch the plasma-based technology in the cosmetic market, said: "During my time with thecompany, it has come a longway. It's been very excitingand satisfying."

He said that the minimal invasive surgery market is growing strongly, with the $3bn US market by far the largest in the world, and that the "obvious match" with Olympus makes perfect sense, as Gyrus needs to increase its presence in the general surgery market and to grow outside the US.

The KBC analyst Mr Cuddon said that the hefty premium paid to secure Gyrus, and the potential for a counter-bid, should alert UK investors to the UK medical device market, which has been undervalued by investors. "Now people will sit up and listen. There's some really good technology and some very good intellectual property in the UK, and this proves it. It's a fantastic deal that provides a great read-through for the entire medical device market," he said.