Smith & Nephew merger talks with J&J orthopaedics unit collapse over leadership dispute

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Smith & Nephew, J&J merger collapse

Highlights

Smith & Nephew and Johnson & Johnson end advanced merger talks valuing J&J's orthopaedics unit at up to $22 billion due to leadership disputes.
Agreed terms included J&J shareholders owning 50.1% of the combined entity and Smith & Nephew paying approximately $10 billion in dividends to J&J via new debt.
Smith & Nephew shares fall 21% over the past year, underperforming the FTSE 100's 13% gain, as activist pressure and executive pay disparities persist.

Leadership clash derails advanced merger plan

As first reported by the Financial Times, the two companies reach advanced talks on a deal that aligns on core financial terms and transaction structure before unravelling over leadership, according to people familiar with the matter.

Johnson & Johnson wants Namal Nawana, the head of its orthopaedics division and a former Smith & Nephew chief executive, to lead the combined company. Smith & Nephew refuses, insisting that its current chief executive, Deepak Nath, remain in charge, with chair Rupert Soames making that condition a red line in negotiations.

The proposed transaction values J&J's hip and knee replacement business at as much as $22 billion, nearly double Smith & Nephew's market value of £9.4 billion, or $12.6 billion. The companies agree that J&J shareholders would own 50.1 per cent of the combined business, while Smith & Nephew investors would hold the rest, and Smith & Nephew would pay roughly $10 billion in dividends to J&J funded through new debt.

The companies are targeting a mid-October announcement before the discussions collapse several weeks ago. J&J says last year that it intends to spin off or sell the division, formerly known as DePuy Synthes, as it shifts focus toward faster-growing businesses.

Strategic implications for Smith & Nephew and London market

The failed tie-up shows how close Smith & Nephew comes to using a large-scale merger to address years of weak growth in orthopaedics. The company faces pressure from activist investor Cevian and from other shareholders who call for a separation of its own orthopaedics arm because of underperformance.

Nath rejects calls for a break-up earlier this year and says the division is operating better. Smith & Nephew shares are down 21 per cent over the past 12 months, compared with a 13 per cent rise in the FTSE 100 index.

The abandoned combination also highlights the risk of another major London-listed company shifting its balance toward the U.S. Some of the people say Smith & Nephew would likely have elevated its U.S. listing while keeping its London quotation as part of the merger.

Executive pay remains part of the wider backdrop. Smith & Nephew says in 2019, when Nawana leaves after 18 months, that it cannot meet his expectations on pay relative to U.S. device groups, and this year the company cites the risk of losing another chief executive to U.S. pay gaps when raising Nath's maximum package to $15.3 million from 2027, up from $7.2 million last year. J&J and Smith & Nephew decline to comment.

Activist investors pushing Big Yellow to consider a sale has been a key recent example of how shareholder pressure can force UK-listed companies to revisit strategic options. Our earlier article noted that Irenic Capital Management and Ancora Holdings built significant stakes and argued the group was undervalued, reigniting takeover speculation amid broader consolidation in UK listed real estate.

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