Tickers in this Article: BAX, SYNO, JNJ, BCR
Biomaterials and medical tools company Synovis (Nasdaq:SYNO) has almost always been a source of frustration to me as a med-tech analyst. The company's products offer legitimate benefits and improvements over the state of the art, the company generated positive cash flow and management seemed no worse than competent and realistic.

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And yet, this company just never got much love or attention. The trading volume was too low to attract sell-side analysts and the company too small to appeal to very many institutional investors. As a result, it takes a buyout by large-cap med-tech titan Baxter (NYSE:BAX) for the company to finally deliver some of its promise to its shareholders.

The Deal
Before the open on Tuesday, the two companies announced that they had reached an agreement whereby Baxter will acquire Synovis for $28 per share in cash. While that translates into a $325 million sticker price, the cash on Synovis' balance sheet cuts the net outlay to just $260 million.

This deal presents a 52% premium for Synovis shareholders, but still not necessarily a very expensive deal for Baxter. At a little over three times sales (albeit nearly 22 times EBITDA), Baxter is paying a price that historically is rather low in the realm of growing small-cap medical technology companies. (For related reading, see EBITDA: Challenging The Calculation.)

What Baxter Is Getting
It is not as though there are not reasons that Baxter is getting a fairly respectable deal for this company. Although Synovis products like Peri-Strips and Veritas held a lot of theoretical potential, the company had not made much of a dent in the $2 billion addressable market in the last 10 years. Then again, the company has strung together a couple of years now of double-digit sales growth, so perhaps things were starting to turn.

It wasn't so much that there were product performance issues with Synovis' offerings, but rather just the difficulty in a tiny company competing with the likes of Bard (NYSE:BCR), Covidien (NYSE:COV), Johnson & Johnson (NYSE:JNJ) and Cook in the soft tissue repair market. Likewise, even companies like Integra Life sciences (Nasdaq:IART), Wright Medical (Nasdaq:WMGI) and Kinetic Concepts have found it challenging to compete in areas like tissue repair and wound care.

What's more, there's not as much gee-whiz technology or product differentiation here as med-tech investors may like. Although there is compelling clinical evidence pointing to the advantages of processed bovine tissue in lieu of using the patient's own tissue grafts, doctors are a stubborn lot in the absence of unequivocal data and cost savings. (For related reading, see Investing In The Healthcare Sector.)

A Solid Deal for Baxter
This is a solid deal for Baxter, but realistically it's not going to make much of a dent for a while (if ever). True, Baxter does have a biosurgery business, but it is so small that the company rarely talks about it nor has to give much information about it in regulatory filings. Still, this is an opportunity to grow behind the surgical sealants and bone void filler that the company already has.

Longer term, who knows? I have long thought that Synovis had good products and simply needed stronger marketing and distribution. Assuming that Baxter is willing to commit additional dollars to really supporting this deal, it looks like that question will get resolved one way or another.

The Bottom Line
I'll admit that I had long thought Integra and Synovis were destined to someday get together, but this offer from Baxter is not a bad exit for shareholders. It's hard to see that the company left much on the table here, as although there is definitely greater sales potential for Synovis' products, it's unclear if the company could have reached that potential in a timely fashion on its own.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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