Smith & Nephew plc (London) announced on February 3 the "execution of a definitive agreement" to acquire the U.S. medical device company ArthroCare Corp. (Austin, TX) for a cash price of $48.25 per ArthroCare share, a total of about $1.7 billion. This comes only weeks after ArthroCare agreed to pay $30 million to settle securities fraud-related charges with the U.S. Department of Justice.
Though indubitably aware that the object of his desire was damaged goods, Smith & Nephew CEO Olivier Bohuon kept his eye on his target's assets. He said in the press release announcing the deal, "This is a compelling opportunity to add ArthroCare's technology and highly complementary products to further strengthen our sports medicine business. Together, we will be able to generate significant additional revenue from the more comprehensive portfolio, combined sales force and Smith & Nephew's global footprint."
ArthroCare has what it takes to interest Smith & Nephew. Its patented Coblation technology, a radio frequency technique, dissolves target tissue with minimal damage to surrounding healthy tissue. This technology is used extensively in many types of minimally invasive surgery. Smith & Nephew already licenses an earlier version of Coblation. And while Smith & Nephew is a major player in hip and knee replacements, one of ArthroCare's specialties is shoulders and other soft-tissue surgeries.
The two are also complementary in market penetration. ArthroCare is big in the States, but weak overseas. Smith & Nephew's strength is in international markets, and sees opportunity in bringing ArthroCare's products and technologies to the rest of the world.
The news of the deal sent ArthroCare shares skyward. On a day when the rest of the NASDAQ was down 2.61%, ArthroCare stock was up 8.24% at the closing bell, to $49.12. This is an $0.87 premium over the takeover price, which may be a sign that investors are speculating on another, better offer.
Writing for the The New York Times, Quentin Webb thinks this is unlikely, "because Smith & Nephew is a better fit, and so has more potential synergies, than other bidders."
Not surprisingly, the lawyers are already sharpening their cutlery. Numerous suits have already been filed alleging that the acquisition price is below ArthroCare's true value. One claims to have found an analyst who says ArthroCare's true value is $60 per share. And maybe it would have been, had the firm's previous management not been so clever.
