Should Medtronic Buy Smith & Nephew?

Medtronic's avoided rumors of takeover interest, but should the market's largest pure medical device player make a big push into orthopedics?

Jun 6, 2014 at 9:30AM

Orthopedics device maker Smith & Nephew's (NYSE:SNN) been no stranger to the spotlight over the past month. Mergers and acquisitions have defined the health care sector in the early goings of 2014, and Smith & Nephew's emerged as the latest target for a buyout. Rival orthopedics giant Stryker (NYSE:SYK) was linked to the firm earlier, and while Stryker still might make a play for Smith & Nephew down the line, the newest company rumored to be interested in a merger, Medtronic (NYSE:MDT), isn't an orthopedics star.

Medtronic's made its name in the cardiac device market, but reports that the firm's eying moving into orthopedics make Smith & Nephew a top target. But with company leadership avoiding questions about the topic and eying returning value to shareholders, an imminent deal for Smith & Nephew looks unlikely. Still, would Medtronic make a good fit for this medical device company?

Smith & Nephew: Worth Medtronic's buy?
Stryker and Medtronic are two different beasts linked to Smith & Nephew. While Stryker makes the bulk of its money from orthopedics products such as knee replacements and hip replacements, Medtronic made more than 50% of its revenue in its most recent quarter from its Cardiac and Vascular Group. On paper, a Smith & Nephew acquisition doesn't bring close to the synergies to Medtronic that it does to Stryker.

Additionally, Medtronic late on Thursday said it's focused on revenue and earnings growth – and that potential acquisitions would be undertaken with returning shareholder value in mind. Medtronic's done a good job keeping quarterly revenue churning higher over the past three years, a trend that's boded well for investors.

MDT Chart

MDT data by YCharts

In the near term, that goal rules out Smith & Nephew, whose takeover would likely require a significant matter of time to maximize the addition of its spine and hip and knee replacements to Medtronic's portfolio. While Medtronic operates a small spine product business already, it accounted for less than 18% of the company's overall sales in its most recent quarter.

Also, Smith & Nephew – while a sizable business – isn't one of the top leaders in the orthopedics space for spine products and hip and knee replacements. According to Bloomberg, the firm's only ranked fifth in those areas – enough to make Medtronic a player, but hardly enough to put it on the same level of competition as the giants of orthopedics such as Stryker and Johnson & Johnson.

However, Medtronic has one big reason to look overseas for an acquisition like Smith & Nephew. Over the past nine months, Medtronic's made nearly 50% of its revenue outside of the U.S. over the past nine months. According to a new report from the U.S. Public Interest Research Group, the company holds more than $20 billion offshore. Following in Pfizer's planned footsteps for the now-failed attempt to buy AstraZeneca, Medtronic could use an acquisition of Smith & Nephew to incorporate overseas and return cash to shareholders while avoiding hefty taxes.

Medtronic, though, believes that's not necessary to bring some of that money home. The company feels it can return around 50% of that cash pile to shareholders over the next five years even without a tax inversion. While Smith & Nephew's emerged as a strong player overseas – particularly in emerging markets lately – that strength is more of a luxury to Medtronic than a necessity.

Not the best deal Medtronic could make
While Medtronic could capitalize on a Smith & Nephew acquisition to expand into orthopedics while bringing back more cash to shareholders, there are simply not enough advantages to a takeover. Medtronic's commitment to maximizing revenue and earnings growth is at odds with the lack of synergies that a merger with Smith & Nephew would bring. With Medtronic confident in its ability to return overseas cash to shareholders even without a tax inversion, the benefits don't add up to a multi-billion dollar acquisition – particularly the way Smith & Nephew's stock has rocketed up the charts lately. For investors, this is one health care acquisition that's better off avoided.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Dan Carroll has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson and Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers