U.S. Markets closed

Stryker Continues Acquisition Spree but Shares Fall

Zacks Equity Research

In a bid to add more assets to its portfolio, Stryker Corporation (SYK), one of the world’s leading medical technology companies, entered into two definitive agreements to acquire German surgical tools firm, Berchtold Holding, and U.S.-based developer of hip arthroscopy products, Pivot Medical, Inc., last month.

Following the announcement of the proposed Berchtold acquisition, shares rose 0.6% to open at $83.81 on Feb 18. The stock, however, recorded an intra-day fall of 1.4% to close at $82.62. It is interesting to note that Stryker stock hit a new 52-week high of $83.86 in the previous trading session. Since the announcement of both the acquisitions, shares declined 1.8% till the last closing day.

The Berchtold Acquisition

Berchtold, a privately-held business, is a provider of surgical infrastructure equipment with operating facilities in Germany and the U.S. Berchtold’s product portfolio comprises surgical tables, equipment booms, and surgical lighting systems committed towards maximizing efficiency and safety in operating rooms and ICUs.

The acquisition is expected to boost Stryker’s fast growing endoscopy division and operating room equipment product portfolio by adding complementary solutions. The deal allows Stryker to strengthen its portfolio and broaden its hospital product offerings.

Stryker will acquire Berchtold for an enterprise value of $172 million. Subject to standard anti-trust regulations, the transaction is anticipated to close in the second quarter of 2014. It is expected to be neutral to Stryker’s 2014 earnings per share excluding acquisition, integration-related and intangible amortization charges.

The Pivot Acquisition

Pivot, a privately held business, sells products for hip arthroscopy with operating facilities in Sunnyvale, Calif. It specializes in hip arthroscopy procedures treating femoroacetabular impingement syndrome (:FAI). Pivot's platform of instruments and implants provide efficient access to and restore mobility of the hip with minimal incisions.

Pivot’s offerings are expected to complement Stryker's existing Sports Medicine portfolio and will provide Stryker's customers with more comprehensive solutions to address certain challenges faced during current Sports Medicine procedures.

Stryker will acquire Pivot in an all cash transaction. Subject to customary closing conditions, the transaction is anticipated to close in the first quarter of 2014. The acquisition is expected to be neutral to Stryker’s 2014 earnings per share, excluding acquisition, integration-related and intangible amortization charges.

Recent M&A Activity

In Dec 2013, Stryker completed its $1.65 billion acquisition of Mako Surgical Corp. and its robotic-surgery platform. The acquisition complemented Stryker's existing line of replacement hip and knee joints and is intended to improve procedural efficiency.

Stryker also announced the acquisition of Irvine, Calif.-based Patient Safety Technologies Inc for $120 million in the same month. The acquisition helped Stryker gain access to Patient Safety's device to reduce the risk of surgical sponges being left in patients after surgery.

Our Take

Both the Berchtold and Pivot deals could not boost investors’ confidence in Stryker because these are expected to be neutral to 2014 earnings, excluding charges. In fact, investors are much more concerned about the company’s weakening liquidity and higher leverage.

In 2013, net cash deployed in investing activities doubled to $2,217 million fueled by the increased number of acquisitions during the year, resulting in a 4% drop in the cash balance to $1,339 million as of Dec 31, 2013.

The balance sheet also indicated a stupendous 56.8% rise in long-term debt to $2,739 million as of Dec 31, 2013. Despite currently having a low debt-to-equity ratio of 0.30, it is still higher than 0.20 in the previous year, calling for better debt management. 

Quick ratio declined sharply to 2.07 in 2013 from 3.05 in the previous year, indicating weakened liquidity. In the wake of such shaky financial indicators, investors remain cautious of the future outlook of the firm.

Currently, Stryker carries a Zacks Rank #2 (Buy). Some other stocks worth considering in the medical instruments industry include Enzymotec Ltd. (ENZY), Covidien Plc. (COV) and Nuvasive Inc. (NUVA). While Enzymotec holds a Zacks Rank #1 (Strong Buy), both Covidien and Nuvasive carry a Zacks Rank #2 (Buy).

Read the Full Research Report on SYK
Read the Full Research Report on COV
Read the Full Research Report on NUVA
Read the Full Research Report on ENZY

Zacks Investment Research