The long, winding road trekked by upstart robotic surgical technology maker MAKO Surgical (UNKNOWN:UNKNOWN) has finally reached the finish line.
In a huge, surprising win for investors, orthopedics giant Stryker (NYSE:SYK) announced Wednesday that it will buy MAKO for about $1.65 billion. It's vindication for MAKO shareholders who in the past two years have weathered a plunging stock price that only recently had begun to recover some of those losses, as MAKO's stock almost doubled today on the news. For MAKO, the acquisition's a clear-cut success – but for Stryker, this deal paves the way for something potentially greater for years to come.
MAKO's pros and cons
Stryker is paying a hefty price for MAKO. The company's paying $30 per share for the robotic surgical maker, a giant premium on the stock's Tuesday closing price of slightly more than $16. Investors even have reacted negatively to what some see as overpaying for the innovative company, as Stryker's stock fell more than 2% on the news.
In the short term, Stryker will take a hit. The deal is expected to cost the company between $0.10 and $0.12 in earnings per share for all the integration and costs of bringing MAKO into the fold.
MAKO, for its part, also has shown slower growth than anticipated in its life span, which likely has Stryker investors nervous. The company's had a hard time growing yearly sales of its RIO surgical systems, but has managed to keep sales consistent over the past few years. However, MAKO made up for that by introducing its MAKOplasty application for hip replacements, a tool that's grown in usage and has only become more familiar with surgeons as it has proliferated across the market.
As of the second quarter, MAKO had more than 65% of its commercially installed RIO systems paired with the MAKOplasty. That has helped the company grow total surgeries significantly, with a 26% year-over-year gain in total MAKOplasty procedures for the quarter. That surgical growth will be key for Stryker in the future as it tries to push the RIO and its applications across a wider audience and into greater acceptance throughout the medical community.
That kind of acceptance has helped robotic surgery's leader and the company MAKO is (erroneously) often compared to -- Intuitive Surgical (NASDAQ:ISRG) -- post rapid growth over the past few years, despite its stock's downturn in 2013. Intuitive's da Vinci surgical suite was responsible for more than 450,000 surgical procedures in 2012, and procedural growth has helped the company increase both its sales and earnings each year for the past three years. That's the kind of growth that MAKO investors could only hope for in the past.
Despite the reservations and the costs, MAKO's potential is something that could keep Stryker atop the orthopedics industry for years to come.
Stryker's acquisitions push
Stryker has had its share of problems recently. Falling prices across the medical device industry have cut the company's sales growth in its key hip and knee replacement divisions, as prices for those two markets fell 23% and 17%, respectively, between 2007 and 2011, according to a recent in-depth report by industry group AdvaMed. Stryker's hip replacement sales grew only 1.1% year over year in the second quarter, while its knee replacement revenue grew an even smaller 0.6%.
That's not the kind of growth that Stryker wants to see out of its two top-selling businesses. Even as Stryker of late pushed its faster-growing, smaller businesses, such as its neurotech component, it has looked to acquisitions to jump-start sales.
Earlier this year, Stryker turned to international growth to power its future. The company's purchase of China's Trauson Holdings for $764 million added to its trauma and spine businesses' potential in the world's second-largest economy and third-largest health-care market.
Now, innovation takes the lead in Stryker's plan for the future. The company has faced toughening competition in the orthopedics space, as smaller rival Smith & Nephew (NYSE:SNN) has boosted its own international presence recently and is a force in the trauma business, where it grew its segment's sales 3% last year. More concerning for Stryker and its investors is Johnson & Johnson (NYSE:JNJ), which, after its colossal acquisition of orthopedics mainstay Synthes last year, grew its medical device revenue by nearly 10% in 2012 and has emerged as a dominant player in the orthopedics market.
Having J&J as a top competitor isn't any company's cup of tea, so an innovative move to cement its place in the orthopedics market is just what Stryker needed. Stryker's CEO, Kevin Lobo, specifically mentioned MAKO's long-term potential in joint replacements as a key driver of the acquisition. Additionally, the U.S.'s aging population will help drive hip replacement and knee replacement sales in the near future as baby boomers demand mobility as seniors -- and command the wealth needed to attain that end.
A win for both parties
The future's adding up strongly for the orthopedics industry, but MAKO's acquisition provides the innovative edge that will help Stryker stave off price cuts across the medical device sector while also giving it a distinct advantage on rivals such as Smith & Nephew and J&J as the RIO and MAKOplasty become more widely accepted around the medical community.
The deal might be costly now and weigh on earnings in the near future, but it's the long term that savvy investors pride. Stryker has the resources that MAKO never had, and you can bet that it will make the most out of its big buy. For MAKO investors, the acquisition's the welcome end of an up-and-down road for a high-profile stock. For Stryker investors, it's the beginning of what could become a dominant future in the orthopedics industry for years to come.
Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool recommends Intuitive Surgical, Johnson & Johnson, and MAKO Surgical. The Motley Fool owns shares of Intuitive Surgical and 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.