Countdown to Zimmer's Offer
BY EDITOR, JUNE 9, 2003
It's 8 days and counting. There's been quite a bit of maneuvering on both sides but until Zimmer's offer is official on June 17th, 2003, nothing of substance can happen. This is patently obvious on the Centerpulse website which gives a timetable to completion of the Smith and Nephew offer for shareholders, but doesn't mention Zimmer's proposed counter offer. Once Zimmer's offer is official, no doubt it will appear on the Centerpulse website.
Both Smith & Nephew's stock price and Zimmer's stock price have been gyrating with each new press release since May 20th (the day of Zimmer's announced counter offer). We wondered if all this movement had altered in any way the gap between Smith and Nephew's offer and Zimmer's offer. On May 20th, Zimmer had claimed that its offer was “... a 26% premium over the closing price per Centerpulse share on March 19, 2003, the trading day immediately prior to announcement of the Centerpulse-Smith & Nephew transaction, and a 19% premium over the proposed Smith & Nephew transaction, based on the closing share price for Smith & Nephew ordinary shares on May 19, 2003.”
Both Zimmer's proposed offer and Smith & Nephew's offer are a combination of cash and stock. In Zimmer's case, 3.68 shares of Zimmer stock plus 120 Swiss francs per share (that's about $91.86 per share in cash). In Smith & Nephew's case, 25.15 shares of Smith & Nephew stock plus 73.42 Swiss francs per share (about $56.20 per share in cash).
The day before Zimmer made its announcement, its stock was trading at $48.28 per share. Smith & Nephew was trading at 413 pence (about $6.88 per share). Since then both company's stocks have fallen. As of this past Friday, Zimmer was down to $44.00 per share and Smith & Nephew was down to 373 pence. Has this changed the premium Zimmer claimed over Smith & Nephew's offer on May 19th of 19%?
Yes, it has increased it! Interestingly enough, on the day of the announcement, because Smith & Nephew's shares were fairly strong, the premium was less than Zimmer suggested – more like 16%. But in the 12 trading days since then, the market (by changing the prices of Zimmer and Smith & Nephew shares) has kept the premium between 18.70% and 23.52% – averaging 21.18%. Why would the market, in its collective wisdom, keep a 21% gap between the two offers – which is higher than Zimmer's intended premium on May 20th?
Presuming the market is semi-efficient, this strikes us as a vote for Zimmer's offer and subsequent combination. First of all, by maintaining Zimmer's intended premium, the market seems to be saying that Zimmer's offer is for real and will probably prevail. Second, by moving the gap higher than Zimmer's proposed 19%, it seems to be saying that adding Centerpulse to Zimmer will be good for Zimmer over the coming 12-18 months (we don't think the market looks much beyond that time frame).
But, as we said, the market is semi-efficient. We have a lot of respect for Smith & Nephew's ability to counter Zimmer with a creative and compelling counter offer. And Centerpulse, we think, would be an excellent addition to Smith & Nephew. So, in a little over a week, all the cards come on the table. The market, no doubt, will render its opinion by selling off or buying these two stocks. And the only thing we know for sure is that it will be interesting. Even unexpected.
