Strategy Process Section 001 Blog

Forbes
Evelyn M. Rusli, 07.27.07, 2:45 PM ET

The world's leading supplier of medical devices is about to get a bit bigger. On Friday, Medtronic announced that it would acquire Kyphon in a deal worth $4.2 billion.

Shareholders of Kyphon (nasdaq: KYPH - news - people ), a spinal medical device company, will get $71 a share, a 31.8% premium over Thursday's closing price. According to Medtronic (nyse: MDT - news - people ), the deal will be neutral to the company's earnings in the first year after the deal closes and accretive thereafter. Eventually, the merger will "yield significant revenue, cost and tax synergies," Medtronic said Friday.

The news boosted Kyphon shares up 24.8%, or $13.33, to $67.01 in afternoon trading. Meanwhile shares of Medtronic were down 0.2%, or 12 cents, to $50.80.

By acquiring Kyphon, Medtronic will significantly expand its footprint in the spinal surgery business and boost its international presence. Currently, Medtronic specializes in devices for young patients with scoliosis and degenerative disc disease. Kyphon, on the other hand, focuses on older patients with vertebral compression fractures and spinal stenosis.

The Sunnyvale, Calif.-based company has made significant gains in its niche market, on Friday, the company reported that second quarter revenues climbed 43% to $144.3 million, while profits jumped 16% to 23 cents a share. Analysts were looking for earnings of 23 cents a share on revenue of $141.1 million.

Furthermore, Kyphon's existing relationships with interventional radiologists and interventional neuroradiologists--groups that Medtronic has not focused on in the past--will also help the company enlarge its global customer base.

"Together, the combined entity will be able to leverage its knowledge of modern fusion, dynamic stabilization, artificial disc replacement, biologics, vertebral augmentation, interspinous process decompression, disc disease diagnosis, navigation and minimally invasive techniques to serve patients with a broader variety of spinal disorders in order to alleviate pain and restore health for more patients," the companies said in a joint statement Friday.

The deal comes as Medtronic faces continued pressure in the U.S. implantable cardioverter defibrillator market (ICD). Although ICD sales are strong abroad, the U.S. market has been plagued by safety concerns. Over the last two years, Medtronic and a competitor, Guidant, have issued a spate of recalls. In response, physicians and hospitals have dramatically pulled back on referrals for ICD units amid safety and insurance reimbursement problems. (See: "Medtronic Up Despite U.S. Blues." )

By building its presence in the spinal device market, Medtronic may be looking to dilute its dependence on ICDs. Of course, Medtronic has other avenues, as its pipeline also includes diabetes, spinal, and cadiac surgery devices. Recently the company hinted that it is ready for a major acquisition.

According to analysts, a takeover, such as Kryhon, would dilute its financials--the company plans to pay for the deal with a combination of cash and debt--but it would help them further diversify their business and expand their earnings multiples.

“We expect our combination with Kyphon to help accelerate the growth of Medtronic’s existing spinal business by extending our product offerings into some of the fastest growing product segments and enabling us to provide physicians with a broader range of therapies for use at all stages of the care continuum,� Medtronic Chief Executive Art Collins said Friday. "Kyphon’s world-class, global sales force will play a central role in the continued development of our spinal business,� Collins concluded.