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 (NYSE:SYK) 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.
The merger seems to be a good fit for both companies.
Stryker gets to boost its spine division as it competes with Johnson & Johnson (NYSE:JNJ) and Zimmer Biomet (NYSE:ZBH). 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.
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.
Brian Orelli has no position in any of the stocks mentioned. The Motley Fool owns shares of Johnson & Johnson and has the following options: short October 2018 $135 calls on Johnson & Johnson. The Motley Fool has a disclosure policy.