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Stryker Corporation (SYK - Analyst Report), the leading medical device provider in the global orthopedics market, must have big dreams about the small and not-so-old robotic assisted surgery developer MAKO Surgical Corp. ; otherwise it would not have agreed to acquire the latter at a handsome premium of 85.5% to its closing price of $16.17 on Sep 24.

Stryker inked a deal to acquire MAKO for $30 per share, putting the deal’s value at about $1.65 billion. The deal also includes the issuance of 3.953 million shares related to a previously planned acquisition by MAKO.

What Makes Mako?

Based in Fort Lauderdale, Fla., MAKO was founded in Nov 2004 and generated sales of $102.7 million last year. The deal will allow SYK to get hold of MAKO’s advanced robotic arm technology known as Robotic Arm Interactive Orthopedic System, or RIO. The technology helps orthopedic surgeons in performing knee and hip joint replacement surgeries.

MAKO’s product line also includes Restoris implants and the recently introduced Makoplasty total hip arthroplasty, which is a new robotic arm system intended for patients in need for complete hip replacements.

What Drives the Hefty Premium?

Stryker is very much excited about inheriting MAKO’s robotic technology as the company believes it has long-term potential for human joint reconstruction. It is worth to note in this context that MAKO’s pioneering RIO system has not been widely adopted as it should be due to inadequate training and marketing efforts. As a result, SYK intends to fill up this gap by utilizing its efficient marketing and training system and gain a competitive edge in the stagnant hip-and-knee replacement market.

Secondly, Stryker can proceed with the further implant development for MAKO’s technologies utilizing its R&D capabilities. MAKO lack resources compared to Stryker in developing implants for its systems. Therefore, the acquisition clearly bridges this gap and enables SYK to meet the wider joint reconstruction needs.

Investors’ Reaction

Although the acquisition is yet to be approved by MAKO shareholders, there is no reason to believe that they will not sanction the deal simply because it is set at a hefty premium. Shares of MAKO soared 82.2% to $29.46 yesterday.

However, shareholders of Stryker do not look happy about the deal. This is because the acquisition will reduce the company’s adjusted earnings per share by about 10 cents–12 cents in the first full year (excluding acquisition and integration costs), be neutral in the second year and finally accretive to earnings in the third year, which seems a bit too far. Shares of SYK slipped 2.9% to $68.79 after the market closed yesterday.

Currently, Stryker retains a Zacks Rank #3 (Hold). While we remain on the sidelines about the company, other medical products companies that are performing well include Alere Inc. (ALR - Snapshot Report), with a Zacks Rank #1 (Strong Buy), and Boston Scientific Corporation (BSX - Analyst Report), with a Zacks Rank #2 (Buy).
 

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