Not all small-cap med-tech stories work out like Intuitive Surgical (NASDAQ:ISRG) or NeuroMetrix (NASDAQ:NURO) -- or for those with a couple more grey hairs, MiniMed. Sometimes products never work, never quite sell, or simply get overshadowed by better technologies. And then there are cases like Encore Medical (NASDAQ:ENMC), where there's a real business, but the margins and returns just never seem to reach the level that typically marks successful companies and stocks.
Encore has a pretty respectable business in rehabilitation and sports medicine, as well as a smallish surgical orthopedic implant business, but just never seems to have really gotten going. For those investors who've been waiting patiently for some time, the wait is now over -- Encore has announced that it's selling itself to Blackstone, a private equity group, for $870 million in cash. That works out to $6.55 a share, a 36% premium to Friday's close.
Is this price fair? Well, it's below-average on most of the metrics by which small-cap med-tech stocks are judged. On the flip side, Encore never quite delivered the margins, returns on capital, or organic growth that would normally be associated with the high-multiple stocks in this sector. I suppose you could say that it's a compromise -- an OK price for an OK company.
If there's a lesson here, it might be that med-tech investing, like biotech investing, is not easy. There are many companies out there like Encore -- fine businesses to a point, but lacking sufficient sizzle to make themselves popular in the stock market. And it isn't necessarily easy for the average at-home investor to discern which technologies, products, and markets are really high-potential opportunities, and which are more sedate and less promising.
I'm sure some starry-eyed investors out there will think that Encore would have gone on to great things. Alternately, they may have hoped that a company like Zimmer (NYSE:ZMH) or Tyco (NYSE:TYC) would pay more. But for a company like Encore, a 36% cash premium is about as good as you're likely to get.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares). Intuitive Surgical is a Motley Fool Rule Breakers pick. The Fool has a disclosure policy.
