Updated version 2 - Correction - According to the Financial Times, merger talks between Smith & Nephew and Johnson & Johnson's orthopedics division broke down due to disputes over the choice of CEO.

Includes details of the report, analyst commentary, company statements, background information, and charts.

Reuters, October 23 - According to a Financial Times report on Friday citing people familiar with the matter, Smith & Nephew (Smith & Nephew, SN.L) had been in merger talks with Johnson & Johnson (Johnson & Johnson, JNJ.N) regarding the consolidation of their orthopedics business units, but the negotiations ultimately broke down due to disagreements over who would lead the merged company.

The report stated that merger negotiations had reached an advanced stage, and both sides had agreed on the main financial terms and deal structure. However, the talks collapsed at the last moment because Smith & Nephew refused to agree to let its former CEO, Namal Nawana, lead the new combined entity.

The report said that earlier this year, the UK medical device company made an acquisition offer to Johnson & Johnson that would value J&J’s hip and knee replacement business at 22 billion dollars, almost double Smith & Nephew’s 9.4 billion pound (12.58 billion dollars) market capitalization.

A spokesperson for Smith & Nephew declined to comment on the report. Johnson & Johnson likewise refused to comment on the report.

“This merger could have created a comprehensive product portfolio for knee and hip implants, while filling gaps for both companies in the musculoskeletal field,” said John West, Mergermarket’s global head of analysis.

https://www.reuters.com/graphics/JOHNSONANDJOHNSON-DIVESTITURE/moparoennva/chart.png

Leadership and deal terms

Nawana led Smith & Nephew for 18 months and stepped down as CEO in 2019.

He currently heads Johnson & Johnson’s orthopedics division. According to the Financial Times, the US pharmaceutical giant originally intended for him to lead the merged group, but Smith & Nephew insisted that its current CEO, Deepak Nath, remain in charge, leading to waning interest from Johnson & Johnson.

According to the report, before talks broke down a few weeks ago, both sides had planned to announce the deal in mid-October; it also said that if completed, Johnson & Johnson shareholders would hold 50.1% of the merged company.

John West from Mergermarket said it would not be surprising if both parties eventually return to the negotiating table.

Smith & Nephew has been struggling with sluggish growth. After three years of cost-cutting and sales initiatives, the company is hoping that new products will drive revenue.

Johnson & Johnson announced last October (link) plans to spin off its orthopedics business into an independent company named DePuy Synthes. According to reports, that business unit was seeking a valuation of 20 billion dollars (link) and has since attracted private equity interest (link), but no deal has yet been agreed.

Last week, Johnson & Johnson stated (link) it favours a spin-off of the business, targeting mid-2027 for completion.

(1 dollar = 0.7470 pounds)

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