| ZURICH/NEW YORK
ZURICH/NEW YORK Synthes Inc SYST.VX confirmed it was in merger talks with Johnson & Johnson (JNJ.N) about a deal that would be J&J's largest-ever acquisition and reshape the medical devices industry.
A source familiar with the situation told Reuters over the weekend the preliminary talks valued the Swiss company at about $20 billion, although Synthes gave no valuation in its brief statement.
Buying Synthes would allow U.S. healthcare conglomerate J&J to further diversify, but a deal at $20 billion would be a premium of less than 9 percent to Synthes's closing market value on Friday, which some analysts said looked too low.
Synthes shares rose 5.6 percent on Monday, having gained 6.2 percent on Friday as talk circulated J&J or Medtronic Inc(MDT.N) could try to buy the company. J&J shares slipped 0.06 percent in afternoon trading amid weak U.S. stock markets.
"In response to market speculation, Synthes Inc confirms it is engaged in discussions with Johnson & Johnson about a potential business combination transaction," Synthes said in a statement.
Buying Synthes would be J&J's biggest acquisition, giving it a leading position in equipment to treat trauma. Synthes, which posted sales of $3.7 billion in 2010, makes nails, screws and plates to fix broken bones, as well as artificial spine discs.
A spokesman for J&J declined to comment.
Analysts at JP Morgan said an acquisition made sense financially for J&J.
"At the reported purchase price of $20 billion, we estimate a Synthes acquisition would be 3-4 percent accretive to J&J's 2012 GAAP earnings per share," the analysts said in a note.
CHAIRMAN IN DRIVING SEAT
Carla Baenziger, an analyst at Vontobel, said Synthes would double J&J's market share in spine work, while in trauma the U.S. company would become the clear market leader, creating potential antitrust problems.
Analysts at Goldman Sachs put the combined company's spine market share at 29 percent and its trauma share at 55 percent.
J&J's "device business clearly has taken some hits on the cardiovascular side and the ortho side, so this would be a way to rebuild it more quickly," said Tim Nelson, an analyst with Nuveen Asset Management.
Key to any deal will be Synthes Chairman Hansjoerg Wyss -- the second-richest person in Switzerland, with a net worth of $6.4 billion, according to Forbes -- who holds 40 percent of Synthes directly and another 8 percent through family trusts.
Given that big holding, an acquisition would need his buy-in, said ZKB analyst Sibylle Bischofberger, who doubted a deal would come off.
"We would be surprised if Hansjoerg agreed to this as he is still putting his heart and soul into Synthes. But because he is 75 years old, he is maybe prepared to talk with Johnson & Johnson in order to find a good succession plan," she said.
There had previously been speculation J&J, which had cash and short-term investments of $27.7 billion at the end of 2010 and will report results on Tuesday, was interested in buying British orthopaedics company Smith & Nephew Plc (SN.L).
The shares in Smith & Nephew, which has a market value of around $10 billion, fell 3 percent.
The medical device sector has been consolidating as companies seek economies of scale and new business areas. Still, Jack Scannell of Sanford Bernstein doubted anyone would want to take on J&J with a counter-bid for Synthes.
"I don't see this being an auction. I think J&J and Synthes will decide whether it makes sense for them individually," he said.
The deal could signal more acquisitions in the medical device sector as companies try to bulk up during tough times.
Medical devices and diagnostics accounted for 40 percent of J&J's $61.6 billion in 2010 sales, but the business has been hit by competition and recalls in its hip and knee replacement unit.
J&J owns around 250 separate companies under its corporate umbrella. The group attempted to buy U.S. medical device maker Guidant, which specialized in cardiovascular products, several years ago, but was outbid by Boston Scientific Corp (BSX.N).
J&J has also been beset by a wave of recalls of its consumer medicines and other products in the past year.
The healthcare sector has seen a string of international mergers as big companies look to plug gaps in their businesses, including the recent acquisition of U.S. biotech company Genzyme by France's Sanofi Aventis SA (SASY.PA) for more than $20 billion.
(Additional reporting by Ben Hirschler in London and Lewis Krauskopf in New York; editing by Jon Loades-Carter, Will Waterman, Dave Zimmerman and Andre Grenon)