Diversified health-care giant Johnson & Johnson (NYSE: JNJ) has kicked off this season with surprising cheers from investors. After its satisfactory quarterly earnings report, J&J has stolen the limelight by announcing plans to acquire medical-device maker Synthes for a whopping $21.3 billion in cash and stock. Let's check out the deal.

Who's buying what, and how
The announcement of the deal followed a series of rumors that hinted it was coming. But the market ultimately paid more attention to J&J's decision to pay a higher-than-expected sum for the takeover -- and toss in a large chunk of common stock in the deal. J&J said it will pay about $183 for each outstanding share of Synthes, with a breakdown of roughly $64 in cash and $119 in J&J common stock.

Strategic as it is, this deal is also significant for J&J on many other grounds. Let's see how the medical-products giant will benefit from this transaction.

The significance of the deal
For any company, consumer trust and loyalty are important. Inn the case of a health-care company, that's doubly true, since consumers particularly seek safety and quality here. This acquisition sets J&J on the path toward fixing its image problem, after it needed to publicly recall a large number of artificial hips last year

Synthes has an expertise in trauma and skeletal fixations, which could help J&J regain its reputation and popularity in the niche, while simultaneously satisfying its hunger for a more solid medical device segment.

Both these companies can combine their offerings to become a dominant market leader in the orthopedics device industry. The combination, in all probability, would better equip J&J to fight competitors such as Baxter (NYSE: BAX), Medtronic (NYSE: MDT), and Covidien (NYSE: COV), which have built a strong market for themselves through a wide variety of instruments.

Increasing competition
In the orthopedic device segment, J&J faces direct competition from manufacturers like Zimmer Holdings (NYSE: ZMH) and Stryker (NYSE: SYK), both of them specializing in the manufacture of knee and hip replacements. With a larger market share and enhanced device manufacturing skills, J&J may raise overall bar for competition in the orthopedics market. That pressure could drive rivals to acquire smaller companies to ensure their own growth. But even if they do, they'll still face the operational juggernaut that is Johnson & Johnson. The company brings tremendous marketing and distributional wherewithal to the mix, which makes a combined J&J-Synthes something to pay attention to.

Business expansion
Although it trades on the Swiss exchange, Synthes draws the majority of its revenue from North America. In 2010, it reported sales of $2.29 billion from this continent, compared to $1.5 billion from Europe. Clearly, J&J has a huge market to tap, and the acquisition will help it do so. This deal could also provide J&J with further exposure into Latin America -- provided the diversified health care giant can first pass the test in its own country.

Apart from domestic competition, J&J will likely face increased scrutiny from federal regulatory agencies in the US. How can we forget the warnings by FDA over the company's defective devices? J&J's reputation has been bruised and battered by a seemingly endless series of embarrassing recalls.

Still, by purchasing Synthes, J&J should be positioned very well in a future in which demographic trends make joint replacements increasingly frequent.

The Foolish bottom line
Although the deal is subject to the approval of European Commission and also of Synthes's shareholders, it is expected to create long term synergies for J&J. While reaction to the deal, specifically the stock component was negative, shares are already trading higher than pre-announcement levels. I expect the deal fetch good fortunes for J&J, but let me know what you think in the comments below.

Anupama Pattanaik doesn't hold shares of any of the companies mentioned in the article. Covidien, Johnson & Johnson, and Stryker are Motley Fool Inside Value recommendations. Johnson & Johnson is a Motley Fool Income Investor selection. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Johnson & Johnson, Medtronic, and Zimmer Holdings. Alpha Newsletter Account, LLC owns shares of Johnson & Johnson. 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.

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