J.&J. Said to Be in Deal Talks With Synthes
By MICHAEL J. DE LA MERCED
Surgical power tools made by Synthes, a Swiss-American company.Christian Hartmann/ReutersSurgical power tools made by Synthes, a Swiss-American company.

8:45 p.m. | Updated

Johnson & Johnson is in talks to buy Synthes, a Swiss-American medical equipment maker, for a deal potentially worth $20 billion, according to a person briefed on the matter.

A sale would be among the biggest health care mergers in recent years and the largest ever by Johnson & Johnson.

Discussions are continuing and may still fall apart, this person cautioned.

Shares in Synthes closed up 6.2 percent on Friday at 138.70 Swiss francs, amid speculation that the company was in talks for a potential transaction. The company’s market value as of Friday was about 16.5 billion Swiss francs ($18.5 billion).

Representatives for Johnson & Johnson and Synthes were not immediately available for comment.
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A deal would be the latest in the health care sector, as medical companies seek to fill in holes in their businesses. Earlier this year, Sanofi-Aventis agreed to buy a biotechnology pioneer, Genzyme, for about $20.1 billion.

Johnson & Johnson, the giant maker of health and consumer products, has long been seen as ready to strike a big deal. Analysts at Bank of America Merrill Lynch wrote in a research note last month that the company had a relatively low amount of debt, as well as $28 billion in cash and short-term investments and $14 billion in annual free cash flow.

Johnson & Johnson has struck about six deals worth more than $1 billion since 1998. Its largest takeover to date was its $16.6 billion purchase of Pfizer’s consumer health care division in 2006. That same year, the company lost a bidding war for Guidant, a maker of stents and pacemakers, to Boston Scientific, which ultimately paid nearly $27 billion.

In late December, Johnson & Johnson bid $2.4 billion for the shares in Crucell, a Dutch biotechnology company, that it did not already own.

Though it is perhaps best known for making Tylenol, baby shampoo and many other consumer products, Johnson & Johnson has increasingly shifted more of its business to medical devices, which was its biggest source of sales last year at $24.6 billion. Among the division’s existing offerings are knee and hip replacements, as well as endoscopy and sterilization products and Acuvue contact lenses.

Last year, the company struck a $480 million deal for Micrus Endovascular, a maker of catheters and other devices used to treat stroke victims. Johnson & Johnson also reportedly approached Smith & Nephew, a major British orthopedics company, about a deal in December, but was rebuffed.

Johnson & Johnson has run into trouble with some of its existing device businesses. In August, the company recalled two kinds of hip implants amid more than 400 complaints received by the Food and Drug Administration that the devices failed early in some patients, requiring new hip replacements.

Synthes, which is based in West Chester, Pa., but is listed on the Swiss stock exchange, is a big manufacturer of implants to repair bone fractures, as well as surgical power tools. The company has consistently increased its revenue and profits annually, reporting about $3.7 billion in revenue and $907.7 million in net income last year. North America accounts for about 60 percent of the company’s revenue.

Analysts at Morgan Stanley wrote in a research note on Friday after The Wall Street Journal first reported the talks that a purchase of Synthes would let Johnson & Johnson productively spend cash held overseas and increase its global presence. The analysts added that the potential deal would likely entail “substantial” cost savings over three years.

The largest shareholder in Synthes is its chairman and chief executive, Hansjörg Wyss, who with his family owns about 47.8 percent of the company.

A 1965 graduate of Harvard Business School who joined Synthes in 1977, Mr. Wyss is one of the wealthiest people in Switzerland, with Forbes estimating his net worth at approximately $6 billion. He donated $125 million to Harvard in 2008, the biggest single gift in the history of the school.