J&J in Talks to Buy Synthes

The big news this weekend for Johnson & Johnson ($JNJ) is that it’s in talks to buy Synthes. This would be a huge deal for J&J. I have to say that I’m very skeptical of large-scale mergers. The historical evidence suggests that these deals usually don’t boost profitability.

No deal has been announced yet but the market is guessing that it will be valued at about $20 billion. J&J’s current market value is $165 billion. According to the most recent balance sheet, the company has a cash balance of $27.66 billion so this purchase won’t require any financing.

Buying Synthes, the biggest maker of devices to treat bone fractures and trauma, would end months of speculation about talks between J&J and U.K. device maker Smith & Nephew Plc. Synthes would give New Brunswick, New Jersey-based J&J a line of hip screws, surgical power tools and instruments to treat spinal and soft-tissue injuries that had $3.69 billion in 2010 sales, boosting the U.S. company’s share of the market for trauma care.

“If I were J&J, I would rather buy Synthes,” said Lisa Bedell Clive, an analyst with Sanford C. Bernstein Ltd. in London, in a phone interview today. “It’s the chance to become the market leader in trauma,” which has more long-term growth and profit margin potential than replacement hips and knees.

This could be a very smart move for J&J. Given the fact that its price hasn’t moved much, they’ve been forced into doing something. At this point, I don’t see how buying Synthes is a negative for J&J.

Posted by on April 18th, 2011 at 8:16 am


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