When a Morgan Stanley analyst recently concluded that Johnson & Johnson could do a deal bigger than $10 billion, he wasn't kidding. J&J is in talks to buy Synthes, which makes devices for bone fractures and trauma, for some $20 billion. It would be the biggest deal in J&J history, but that might be just the right size at this point, at least financially; the company has $19 billion in cash on hand.
Rumors had been swirling that J&J might buy device maker Smith & Nephew, which makes hip and knee replacements. But analysts see Synthes as a better addition to the company's wide range of businesses. "If I were J&J, I would rather buy Synthes," Sanford C. Bernstein's Lisa Bedell Clive told Bloomberg. "It's the chance to become the market leader in trauma." And trauma is one of the fastest-growing segments of the orthopedic device market, the Wall Street Journal notes, with 8 percent growth last year. "It's the gaping hole in [J&J's] orthopedic portfolio," a source told the WSJ, "so Synthes really is a good match for them."
Despite analyst cheer about the news, the deal would require regulatory approval, which could be difficult to get. And it may also require approval by a surgical research group, AO Foundation, which is affiliated with Synthes. Furthermore, integrating Synthes into the J&J fold could distract from the company's focus on its manufacturing problems. The company has recalled millions of packages of over-the-counter and prescription drugs; it's cooperating with at least two government probes; and it's fighting hundreds of patient lawsuits, including 600 involving faulty hip replacement devices.
"You could make a fair argument it's not the right time to expand," T. Rowe Price analyst Mark Bussard told Bloomberg. "If I were on their board, I might be asking, ‘Why don't we spend the next year getting our house in order, and then talk about a $20 billion acquisition?'"