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Given Imaging (GIVN), an Israel-based medical device company, was recently urged by investment firm Discovery Group to sell itself. The investment firm believes that the company has been undervalued due to mismanagement. The big question is whether Given Imaging should look for a buyer. If the company decides to do so it could generate significant interest as, in my opinion, it is an attractive takeover target.

Confident on its own

This is not the first time that talk of a sale has surrounded Given Imaging, which manufactures diagnostic products for the visualization and detection of disorders of the gastrointestinal tract. In fact, the company had been considering the option in October last year.

Given Imaging had announced that in order to maximize growth and enhance shareholder value it was exploring its strategic alternatives, including a possible sale. The company backed out from this in January this year, but is revisiting the idea now under pressure to create value for shareholders.

Creating value for shareholders

Given's stock has gained a little under 20% in 2013 so far, underperforming the broader market. Conmed (CNMD), which like Given focuses on surgical devices and equipment for minimally invasive procedures and monitoring, has gained nearly 27% in 2013 so far. It is therefore not surprising that Discovery Group, which has a 3.7% stake in Given Imaging, has urged the company's Board of Directors to create value for shareholders by putting itself up for sale.

In a letter to the Board, the investment firm urged the Board to look for a strategic buyer for the company. Discovery believes that the company could fetch a substantial premium in a sale. In addition, the investment firm urged the Board to implement a $50 million share repurchase or dividend to capitalize on Israel's expiring "Trapped Profits Law". According to Discovery, the move would allow the company to benefit from lower corporate tax rates.

Discovery said in the letter that Given Imaging's stock has been "chronically undervalued in the public markets during the past several years primarily due to mismanagement."

Attractive takeover target

Given Imaging is definitely an attractive takeover target, given some of the developments in recent months. In September, Given Imaging's PillCam SB 3 system received clearance from Japan's Pharmaceuticals and Medical Devices Agency (PMDA). The clearance is significant for Given Imaging as Japan is the world's second largest healthcare market.

The PillCam SB 3 system has been also granted 510(k) clearance by the FDA in the U.S. this year. PillCam SB was first cleared for use by the FDA in 2011. Homi Shamir, CEO of Given Imaging, believes that the third generation PillCam SB will enhance the clinical experience for the company's large base of existing U.S. customers and expand the market for the product among new physicians who have not been performing PillCam procedures.

Given Imaging could receive a major boost if the company's PillCam Colon is cleared by the FDA. In fact, FDA clearance for PillCam Colon could attract some potential buyers to the company. The device has already been cleared by PMDA in Japan for diagnosis of colonic disease when colonoscopy is required but difficult to conduct. Shamir believes that the PMDA's decision could expand the company's potential customer base in Japan from approximately 1,000 today to potentially 10,000. One can expect a similar impact in the U.S. once the device is cleared by the FDA.

Who could buy Given Imaging?

Olympus, which is a major player in the endoscopy devices market, could be interested if Given Imaging puts itself up for sale. While Olympus dominates the global endoscopy devices market with a significant market share, new technologies such as capsule endoscopy are expected to be key growth drivers going forward.

Sale best way forward for Given Imaging

Discovery Group believes that Given Imaging could fetch between $26 and $30 per share in a sale. That represents a premium of between 30% and 50%. A sale will certainly be the best way forward for Given Imaging as the company has the potential to generate significant value for shareholders in the near-term.

Source: Should Given Imaging Look For A Buyer?