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ZURICH/NEW YORK (Reuters) - Johnson & Johnson (JNJ.N) will buy Swiss medical devices maker Synthes Inc SYST.VX for $21.67 billion, placing a big bet on growing its orthopedics business with one of the largest deals ever in the medical technology sector.
The acquisition is the largest for J&J and will make it the world leader in the orthopedic reconstruction market. It may also help the diversified U.S. healthcare group move past a wave of consumer product recalls and the loss of patent protection on top-selling medicines.
"Orthopedics is a large and growing $37 billion global market and represents an important growth driver," said Bill Weldon, J&J's chairman and chief executive.
But Weldon told Reuters in an interview that the Synthes deal was not a conscious effort to elevate the importance of devices over prescription drugs.
"Synthes is held up as one of the premier orthopedic companies in the world and the kind of opportunity that comes up very infrequently," Weldon said. "We're always looking for the best opportunities, wherever they exist, and whatever segment they fit into."
J&J will pay 159 Swiss francs in cash and stock for each Synthes share, the two companies said on Wednesday. That represents a 21.7 percent premium over Synthes' closing share price of 130.60 Swiss francs on April 14, before speculation of a takeover hit the market.
The acquisition, which is expected to close in the first half of 2012 and could be sealed earlier, has the backing of both the Synthes and J&J boards. Synthes confirmed last week it was in talks with J&J.
Synthes posted sales of $3.7 billion in 2010. It makes nails, screws and plates to fix broken bones, as well as artificial spine discs.
The deal is expected to have a modestly dilutive impact on J&J's adjusted earnings per share for 2012. Many analysts had expected a buy would instead lift profit next year, but J&J said there was little overlap between the companies, resulting in few job cuts.
"Usually, with bigger acquisitions investors are focused primarily on cost cutting" that could raise short-term profits, said Morningstar analyst Damien Conover.
Still, he said, the deal could boost J&J's annual earnings growth to 4.5 percent or higher over the next five years from his previous expectation of 4 percent growth.
Under the deal, each Synthes share will be exchanged for 55.65 Swiss francs ($63.48) in cash, with the remaining 65 percent being paid for in J&J stock. It has the backing of Hansjoerg Wyss, who holds 40 percent of Synthes directly and another 8 percent through family trusts.
Shareholders will get up to 1.9672 J&J shares for each Synthes share, so the ultimate value of the deal could fluctuate depending on J&J's share price and the exchange rate of the dollar versus the Swiss franc.
"It is surprising the deal has been struck between cash and shares. The market consensus, and our view, was it would be all cash, so the quality of the take-out is slightly lower than we anticipated," said Morgan Stanley analyst Michael Jungling.
Synthes shares closed near flat at 146.60 francs -- below the J&J offer -- likely reflecting the fact that the final deal price is subject to J&J share price fluctuations. J&J stock was up 0.8 percent at $65.44 on the New York Stock Exchange.
J&J will preserve Synthes' ties with the AO Foundation, a nonprofit Swiss group whose technology and surgeon training have been a key part of the company's success.
The medical device sector has been consolidating as companies seek scale and new business areas, but analysts doubt anyone will come forward with a counter-bid for Synthes.
Matthew O'Brien, analyst at William Blair, said J&J may have to divest some trauma assets to get regulatory clearance for the deal, but he said it was unlikely to sell to rivals Stryker (SYK.N) or Zimmer ZMH.N as it seeks to keep its dominant position.
J&J said it did not believe it would need to divest any products to clear antitrust hurdles.
There had previously been speculation that J&J, which had cash and short-term investments of $27.7 billion at the end of 2010, was interested in buying British orthopedics company Smith & Nephew Plc. (SN.L) Edwards Lifesciences Corp (EW.N) and Intuitive Surgical Inc (ISRG.O) had also been mentioned as potential takeout targets.
Smith & Nephew shares fell 1.7 percent on the news.
J&J owns around 250 separate companies under its corporate umbrella. Medical devices and diagnostics accounted for 40 percent of its $61.6 billion in 2010 sales, but the business has been hit by competition and hip and knee replacement recalls.
It attempted to buy Guidant, which specialized in heart devices, several years ago, but was outbid by Boston Scientific Corp. (BSX.N)
Goldman Sachs advised J&J in connection with this deal, while Credit Suisse is advising Synthes.
Additional reporting by Martin de Sa'Pinto in Zurich, Lewis Krauskopf and Bill Berkrot in New York and Jessica Hall in Philadelphia; Editing by Ben Hirschler, Hans Peters and Matthew Lewis