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Why K2M Group Holdings, Inc. Acquired a Higher Price Today

By Brian Orelli, PhD - Updated Aug 30, 2018 at 12:36PM

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Stryker is buying the medical device maker. Here's what investors need to know.

What happened

Shares of K2M Group Holdings (NASDAQ: KTWO) are up 25.7% to around $27.40 at 12:06 p.m. EDT after the medical device maker announced that it's being acquired by Stryker (SYK -0.74%) for $27.50 per share, valuing the company at about $1.4 billion. Stryker's investors ho-hummed the deal, with shares trading down a little less than 1% today.

So what

The merger seems to be a good fit for both companies.

Stryker gets to boost its spine division as it competes with Johnson & Johnson (JNJ -0.89%) and Zimmer Biomet (ZBH 0.40%). K2M's claim to fame is probably its portfolio of 3D-printed spinal devices. In May, it launched the Mojave PL 3D Expandable Interbody System that allows for bony integration at the ends of the device. With the acquisition, Stryker also gets K2M's chairman, CEO, and president Eric Major, who will stay on as president of Stryker's spine division.

For K2M's part, the company gets a higher valuation than it could on its own because the products are worth more to Stryker through synergies. With its sales force, Stryker should be able to drive sales growth faster than K2M could on its own and do it at a lower cost as it removes redundancies. Stryker didn't say when the deal would be accretive to the company, but one has to imagine it won't take long for the synergies to help Stryker turn K2M's $10.4 million second-quarter operating loss into a profit.

Doctor looking at a spine x-ray with a spine model in the background.

Image source: Getty Images.

Now what

Even though the deal isn't expected to close until the fourth quarter, shares are trading close to the acquisition price in hopes that Johnson & Johnson, Zimmer Biomet, or another company will come in and make a higher offer. While a white-knight deal is always possible and might justify holding onto shares for a few days, the most likely scenario is that the deal will just go through as planned, and investors can sell close to the acquisition price and put their money to work in other small-cap healthcare stocks.

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Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$173.94 (-0.89%) $-1.56
Stryker Corporation Stock Quote
Stryker Corporation
SYK
$230.50 (-0.74%) $-1.71
Zimmer Biomet Holdings, Inc. Stock Quote
Zimmer Biomet Holdings, Inc.
ZBH
$116.91 (0.40%) $0.46

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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