Analysts are eagerly digging into the news that Stryker (NYSE:SYK) put in a takeover bid with Boston Scientific (NYSE:BSX), though many were surprised by the news and are unsure of the obvious strategic value of the acquisition.
News of the deal, which both companies have officially responded to with statemens of “no comment,” emerged yesterday at the Wall Street Journal.
The merger could create a “higher growth Medtronic,” according to Evercore’s Vijay Kumar, adding approximately 2% to Stryker’s expected 2019 earnings per share and up to 6% by next year, SeekingAlpha reported.
SunTrust’s Bruce Nudell thinks the deal makes strategic sense, as it would combine Kalamazoo, Mich.-based Stryker’s deep hospital infrastructure with Marlborough, Mass.-based Boston Scientific’s interventional implantable franchises, according to SeekingAlpha.
Other analysts are curious as to whether another suitor could emerge, though the number of companies that could afford such an acquisition would limit it to major players like Johnson & Johnson (NYSE:JNJ).
Improvements in purchasing power, enhanced market position and synergies across the neuromodulation and endoscopy businesses, and more call points in hospitals topped the list of strategic strengths of the deal for Stryker, according to a Leerink Partner letter to investors.
Boston Scientific is one of the few players in the medtech field with top-line growth near to Stryker’s high single-digit range, Leerink analysts wrote. The deal would most likely be gross margin accretive and “could accelerate [Stryker]’s operating margin expansion trajectory,” which analysts said has been more visible in recent quarters, but might not be fast enough for investors.
“From a financial perspective, we can get to meaningful EPS accretion by year 3, albeit recognizing that a number of variables are at play. Admittedly, we use what we believe to be conservative synergy assumptions, meaning accretion could be sooner/higher, but we struggle to identify the immediate obvious sources of synergies,” Leerink Partners analysts wrote in a letter to investors.
While there are some areas where the deal makes sense, Leerink analysts also had trouble identifying the “overarching strategic rationale” of the acquisition.
“This is a potential transaction that we were not thinking about prior to today and had not historically been speculated about in a meaningful way. From a strategic perspective, these are two relatively diversified companies with relatively minimal overlap outside of BSX’s MedSurg business, which is ~30% of total sales and includes neuromodulation and endoscopy. It’s also not immediately clear to us how SYK would leverage BSX’s cardiology call points other than within a “bigger is better” and “scale matters” strategy. That said, we think the jury is still out on whether “bigger is better” in fact translates to competitive advantages via multiline contracting and cross-selling,” Leerink analysts wrote in a letter to investors.
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