Smith & Nephew
And even though the results were decent (sales up 10% and operating profit up 13%), it seems there aren't enough pro cyclists that need hip surgery to satisfy management's targeted growth objectives. Therefore, the company has been working on the potential acquisition of its U.S.-based competitor Biomet Inc.
- First, management runs the real risk of overpaying for control of Biomet. If Smith & Nephew does overpay, then the value of the acquisition would be imparted to the Biomet shareholders.
- Even if management doesn't overpay, there is the risk that they overestimated the synergies that they can generate from acquiring Biomet. Once again, the Smith & Nephew shareholder would be on the losing end.
- Lastly, even if management doesn't overpay and the synergies are estimated correctly, management could struggle with the post-acquisition integration. This is a real concern when integrating two similarly sized companies. The integration could be hampered by power struggles among the two management teams and clashes in the two business cultures, not to mention any unforeseen snags.
These are all probable pitfalls that the acquisition would face, and all would cause a loss of value for the existing Smith & Nephew shareholders. I would be wary of this deal. Rather, I would root for continued organic growth in Smith & Nephew's core business to create shareholder value, just like I am rooting for Floyd Landis's healthy recovery to racing in the pro peloton.
For related Foolishness:
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Fool contributor Matthew Crews welcomes your feedback -- really! He has no financial position in any of the companies mentioned, nor any orthopedic implants at this time. The Motley Fool has an ironclad disclosure policy .