Synthes confirmed it was in takeover talks with Johnson & Johnson in a potential deal that media reports said could value the Swiss medical device maker at about $20 billion.
A source familiar with the situation told Reuters over the weekend the two sides were in preliminary talks.
Buying Synthes would allow U.S. healthcare conglomerate J&J to further diversify its business, 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.
Shares in Synthes were up 6.8 percent on Monday, having gained 6.2 percent on Friday as talk circulated that J&J or Medtronic could be looking to buy the company. J&J shares rose 0.4 percent in morning trading on the New York Stock Exchange.
"In response to market speculation, Synthes Inc confirms that 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 of Synthes 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.
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 that 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 orthopedics company Smith & Nephew
Shares in Smith & Nephew, which has a market value of around $10 billion, fell 3.5 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 counterbid 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.
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
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 for more than $20 billion.
Other recent medical device deals include the $5.8 billion acquisition of Beckman Coulter by Danaher announced in February.
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