Stryker Buys Orthovita With Cash

| About: Stryker Corporation (SYK)

Medical technology giant Stryker Corp (NYSE:SYK) has struck a definitive agreement to acquire orthobiologic and biosurgery products maker Orthovita Inc (NASDAQ:VITA-OLD) for $316 million in cash. The transaction has been cleared by the Boards of both companies.

Under the deal, shareholders of Orthovita will receive $3.85 for each share they hold. This represents roughly 41% premium over Orthovita's closing price of $2.73 on May 13. The deal value (of $316 million) includes the assumption of $12 million in Orthovita debt. Shares of Orthovita gained $1.09 (or 39.9%) touching $3.82 in early trading on May 16.

Orthovita's Board has recommended the company's shareholders to tender their shares. Shareholders holding roughly 14.5% of Orthovita's outstanding shares have already committed to tender their shares. The tender offer is slated to commence within 10 business days and is expected to close in second-quarter 2011.

The deal is subject to customary closing conditions including the tender of a majority of the outstanding shares of Orthovita and antitrust clearance. Citigroup (NYSE:C) acted as the financial advisors to Stryker on the deal.

Pennsylvania-based Orthovita is a leader in synthetic bone grafts and competes in the $5 billion orthobiologics (substances that help heal injuries) market. The company's orthobiologic product range includes the Vitoss bone graft substitute and the Cortoss bone augmentation material.

Moreover, Orthovita's Biosurgery business offers hemostasis products including the Vitagel surgical hemostat. The company booked sales of $95 million in 2010.

Consolidation has become a norm in medical devices industry as top-tier devices makers continue their merger/acquisition binge to enter new markets and strengthen/diversify their product portfolio, pressed by sustained procedure volume and pricing headwinds.

Stryker, which has annual sales of $7.3 billion, is expanding its product portfolio by acquiring complementary businesses leveraging a solid balance sheet. The $1.5 billion acquisition of Boston Scientific's (NYSE:BSX) Neurovascular assets in January 2011 has provided the company a leeway to diversify into the fast-growing therapy markets. Earlier, Stryker bought privately-held medical products maker Gaymar Industries which boosted its acute-care product offerings.

The Orthovita acquisition is a strategic fit for Stryker, highly complementing its existing orthobiologics offering while strengthening its competitive position. Upon fruition, the deal is expected to be neutral to the company's adjusted earnings per share for 2011.

We believe that Stryker is well placed for growth driven by new product launches, acquisitions and an improving hospital capital spending backdrop. However, the company remains exposed to stiff competition and pricing and procedure volume pressure on its hip, knee and spine products. Our long-term Neutral recommendation on Stryker is backed by a short-term Zacks #3 Rank (Hold).