Stryker Agrees To Buy Pfizer's Howmedica Unit For $1.9 Billion
August 14, 1998 3:55 AM
By Steven Lipin, Staff Reporter of The Wall Street
Journal
Stryker Corp., a Kalamazoo, Mich., maker of
orthopedic products and medical instruments, has
agreed to acquire Pfizer Inc.'s Howmedica unit for $1.9
billion, the latest in a string of deals in the
medical-products sector.
People familiar with the matter said little-known Stryker
won an auction for Howmedica, which is in a similar
business of manufacturing orthopedic instruments. An
announcement is expected as early as today.
Stryker has revenue of about $980 million, and the
acquisition of the Howmedica division, with estimated
sales of more than $800 million, would catapult Stryker
to the No. 1 or No. 2 position in the medical-products
industry. With the purchase, Stryker is expected to have
15% of the roughly $10 billion global orthopedic
market, and more than 20% of the reconstructive-device
market.
Strategically, the businesses appear to fit both by
product and geographically. Stryker makes
reconstructive products for hips, knees and shoulders,
and also sells spinal implants, powered surgical
instruments, specialty hospital beds and other products.
About 65% of its sales are in the U.S., with 25% in Asia
and 10% in Europe.
Howmedica is the third-largest producer of
reconstructive devices, and garners more than 30% of
its sales from Europe. Less than 50% of sales are in the
U.S.
The medical-products business has been consolidating
quickly this year, driven by cost-cutting on the part of
hospitals, a generally fragmented industry, and the desire
by some companies -- particularly Pfizer -- to focus on
higher-margin businesses.
This year, Tyco International Ltd. announced the
acquisition of surgical-instrument maker U.S. Surgical
Corp. for $3.3 billion, and Johnson & Johnson said it
would acquire for $3.5 billion DePuy Inc., which makes
such products as spinal implants and artificial joints.
Pfizer, meanwhile, has spent the past year selling off its
medical-products businesses to concentrate on its core
pharmaceuticals business. In June, the company said it
would sell Schneider Worldwide to Boston Scientific
Corp. for $2.1 billion. It sold its American Medical
Systems business to E.M. Warburg Pincus & Co., a
New York investment firm, for $130 million.
The Howmedica business is the final piece of that
strategy. Pfizer's total sales in the group last year were
$1.45 billion, up a mere 1% from 1996. With products
such as fast-selling Viagra, Pfizer is on a roll in its core
business.
If completed, the transaction would be a bold move for
conservatively minded Stryker, which has banged out a
20%-plus compounded earnings growth rate during the
past two decades. Currently, it has practically no debt
on its books; the transaction will require increasing the
company's debt load sharply. The management's deep
bench, while respected in the industry and on Wall
Street, hasn't been tested with integrating a large
transaction.
During the past two years Stryker's stock has soared
82%, compared with a 64% jump in the Standard &
Poor's 500 stock index, according to Baseline, a New
York financial-data concern. This year, however, the
stock has slightly underperformed the overall market.
The shares dipped in July after the company said
earnings were hurt by currency fluctuations and lower
demand in Asia. But it did report a 20% rise in net
income in the first half, in line with expectations. Sales
increased 7%, though domestic sales rose an impressive
14%. Shares trade at about 23 times next year's
forecast of earnings, which has attracted a fair number of
buy recommendations.
Wall Street probably will be surprised by the size of the
acquisition, but not by the strategy of growing via
acquisitions. In April, Wade King, an analyst at
BancAmerica Robertson Stephens & Co., wrote: "We
believe that Stryker management will be increasingly
aggressive in pursuing strategic acquisitions. . . . Going
forward we believe that acquisitions will be larger than in
years past."
Stryker is expected to incur a charge of $400 million or
so in the fourth quarter to write off in-process research
and development and other acquisition-related charges,
people familiar with the matter say. The transaction is
expected to be dilutive to earnings in 1999 and additive
in 2000.
Thursday, in composite trading on the New York Stock
Exchange, shares of Stryker changed hands at $41.75,
up 62.5 cents; Pfizer, also traded on the Big Board,
closed at $102, up 19 cents.
Goldman, Sachs & Co., Stryker's adviser, and
BankAmerica Corp. are arranging bank financing,
people familiar with the situation said. Pfizer is believed
to be represented by Morgan Stanley Dean Witter &
Co.
Stryker was founded in 1941 by Homer Stryker, who
invented a mobile hospital bed used during World War
II.
Copyright (c) 1998 Dow Jones & Company, Inc.
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