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Why Smith & Nephew plc Is Attracting Interest From Stryker Corporation

Shares in medical equipment manufacturer Smith & Nephew (LSE: SN) have exploded in pre-Christmas trading as speculation over a potential takeover by American group Stryker reaches fever pitch.

The London-based company is currently up around 8% at the time of writing, with shareholders cheering rumours that Smith & Nephew could be the latest healthcare specialist to be snapped up as M&A activity in the sector heats up. Here, I explain why the British company is attracting admiring gazes from across the Atlantic.

Imminent bid on the cards?

According to Bloomberg, surgical implant provider Stryker is readying a bid to acquire Smith & Nephew, a move that could be launched in the coming weeks. The US business commented in May that it was not about to launch a takeover offer for Smith & Nephew, preventing it from readying an attempt until late November at the earliest in line with stock market rules.

The report cited one source who explained that Smith & Nephew could command a premium of up to 30% of its share price. And unlike Pfizer’s attempted acquisition of AstraZeneca earlier this year, Stryker’s rumoured bid is apparently not being fuelled by controversial tax inversion, illustrating the underlying value of the British firm.

Earnings on course to ignite

Indeed, Europe’s largest manufacturer of artificial limbs has a stellar history of generating year-on-year earnings growth, and City analysts expect the business to punch growth to the tune of 4% in 2014, a figure which accelerates to 12% in 2015.

In response to escalating pressure from government and private health plans concerning the cost of its artificial body parts, this summer Smith & Nephew launched its Syncera initiative in the US, a strategy which could cut costs by half as part of a slimmed-down service. It is estimated that the scheme addresses between 5% and 10% of the market, and could drive Smith & Nephew’s current US market share — which currently stands at around 11% — through the roof.

On top of this, the business is also engaged in extensive work behind the scenes to bulk up the bottom line. From engaging in a vast $120m cost-stripping exercise, to rolling out IT systems which assist decision making by measuring profits according to product and country, Smith & Nephew is gearing up to build a much more intelligent earnings-generating machine.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.