Smith & Nephew, the 150-year-old medical products company, yesterday confirmed it was in merger talks with its US rival Biomet to create a $20bn (£10.5bn) orthopaedic specialist capable of competing across the globe.
The company told the stock exchange it "has held very preliminary talks" with Biomet, a US medical devices company which specialises in artificial joints. It said no agreement had been reached and there could be "no assurance that any transaction will be proposed or completed". A merger would put Smith & Nephew on a more equal footing with large US companies that dominate the industry such as Johnson & Johnson, Zimmer and Stryker.
This year, after poor performance and the resignation of its co-founder and president Dane Miller, Biomet hired Morgan Stanley to help consider "strategic alternatives focused on enhancing shareholder value". Since then there has been speculation about a possible takeover, either by a rival or by a private equity group.
The two companies are roughly the same size - Smith & Nephew is valued at about £4.8bn and Biomet, listed on Nasdaq, is worth $8.9bn. Both have high hopes of making money from meeting increasing demand for joint replacements for the baby boomer generation that is now hitting retirement. Biomet, which is based in Indiana, designs and manufactures replacements for hips, knees, shoulders and other small joints. It also has a dental business, which analysts say Smith & Nephew would probably want to sell.
The US Department of Justice is investigating possible criminal violations of anti-trust legislation by the five leading orthopaedic companies, including Biomet and Smith & Nephew. Smith & Nephew said in August that one of its sales representatives in the US, who has since been fired, emailed rivals to suggest they co-ordinate prices for products sold to a hospital.
The merger talks overshadowed Smith & Nephew's scheduled third-quarter results, which showed revenues up 10% to $679m on the back of good performances across all its divisions.
The strong result was due partly to new products such as the Birmingham hip implant, which received approval in the US in May. It is aimed at patients too young for a conventional hip replacement. "It's a very significant opportunity for us to create a new piece of the US market," said chief executive Sir Christopher O'Donnell. He did not comment further on the talks with Biomet but said a merger was "a challenging thing to do for a prudent company like Smith & Nephew". He said the company's small size relative to US rivals did not mean it needed a partner to survive. "There may be an opportunity but it's certainly not a problem," he said.
Jeremy Batstone, an analyst at Charles Stanley, welcomed the results but expressed caution about the possibility of a merger with Biomet. "We remain sceptical as to whether a deal can actually be reached at an acceptable price to both parties," he said in a research note. In 2003, Smith & Nephew unsuccessfully bid for Swiss company Centrepulse, which was acquired by Zimmer.
Smith & Nephew shares fell 21.5p to 488p yesterday.