Smith & Nephew soars on rumours of Stryker interest

Shares in Smith & Nephew spiked by almost 10pc on Monday afternoon following reports that its US rival Stryker is considering returning with a £10bn takeover bid.

The news came days before the expiry of a six-month cooling off period, during which Stryker was blocked by UK takeover rules from making an approach.

In May, Stryker boss Kevin Lobo admitted that he was in the early stages of considering an acquisition of Smith & Nephew but was not prepared to make an immediate bid. The statement prevented Stryker from approaching the FTSE 100 company for another six months. However, the cooling off period ends on Friday.

Stryker has now held discussions on financing the deal, and already considered the competition issues of a tie-up, according to Bloomberg citing unnamed sources.

The UK's takeover rules state that when a potential bidder is in a cool-off period it can still actively consider an offer but it is banned from "taking any steps in connection with a possible offer for the [target] company where knowledge of the possible offer might be extended outside those who need to know in the potential offeror and its immediate advisers". As a result, it is widely accepted that talks must be kept to only dedicated advisers in order to keep leaks to a minimum.

Even if Stryker is considering making an offer, it is prevented from confirming the reports that it is readying a bid until Friday's cool-off deadline passes. Therefore its only options are to remain silent, with the Panel's consent, or start a whole new six month waiting period.

The Michigan-based company is reportedly weighing a so-called inversion deal - an acquisition which involves a US company moving its headquarters outside the country to escape high corporation tax rates at home.

In doing so it would be bucking a trend. While inversions surged in popularity in the early part of this year, a US Treasury clampdown in September scuppered a number of high profile deals, including AbbVie's now-abandoned tie-up with Shire, and stopped other potential deals in their tracks.

Stryker's interest in Smith & Nephew is thought to be less dependent on the toughened up inversion rules since its effective tax rate, at around 23pc, is lower than the UK company's 29pc rate. A deal would help Stryker spend its foreign profits instead of returning it to the US where it would face a 35pc corporation tax, though it would not need to enact an inversion to achieve this outcome.

Analysts are divided over the strategic logic of a Stryker and Smith & Nephew tie-up. Morgan Stanley analysts noted that a merger would slow the US company's annual growth, which currently stands at around 5pc compared with Smith & Nephew's 3pc.

Analysts at Bernstein have however put the chances of a merger at more than a third, saying a tie-up could help cut costs at a time when the industry is facing intense pricing pressure. They also said Stryker could be keen for a merger to help it compete with the scale of the combined Zimmer and Biomet, two major US medical technology companies who announced plans to merge earlier this year.

Smith & Nephew declined to comment. Shares in the company pulled back from their initial spike to close up 22.29p, or 2.04pc, to £11.12.