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Author: TMFTwitty Big funky green star, 20000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 41  
Subject: Interpore Gets Transplanted Date: 3/9/2004 4:08 PM
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http://www.fool.com/News/mft/2004/mft04030912.htm?ref=btp

Interpore Gets Transplanted

By Rich Smith
March 9, 2004

Medical equipment maker Biomet (Nasdaq: BMET) agreed to acquire spinal implant manufacturer and Motley Fool Hidden Gems watch list nominee Interpore International (Nasdaq: BONZ) yesterday.

If approved by Interpore's stockholders, the acquisition will take the form of an all-cash buyout for $14.50 a share -- a total of $280 million. Considering that this offer price represents a healthy 17.5% premium over Interpore's closing price from Friday, it is unlikely that its shareholders will reject Biomet's offer.

But should they? Let's take a quick look at the numbers for both two companies and see if current Interpore shareholders would be better off sticking their profits in the bank or reinvesting them in Biomet.

Both companies have nearly identical net and operating profit margins and returns on assets. Biomet's return on equity, however, is about five percentage points higher than Interpore's, which suggests that Biomet is the more efficiently run company (maybe that's why Biomet is buying Interpore, and not the other way around).

And this is hardly a merger of equals. At $9.7 billion, Biomet's market cap dwarfs that of Interpore. The acquirer is roughly 40 times the size of the acquiree. And Biomet has a very strong balance sheet, with no long-term debt and nearly enough cash on its books to pay for the acquisition out of pocket. So, far from bogging Biomet down with debt-repayment obligations, it is likely that this acquisition is going to quickly start dropping profits down to Biomet's bottom line. In fact, Biomet believes that Interpore will begin generating profits for Biomet by mid-2005.

Thus, Interpore shareholders who opt to "buy the buyer" would have a couple of things working in their favor. They would be trading in shares in a smaller, more volatile company for a much larger and, presumably, more stable investment. As for the profitability of their investment, that would be more or less unchanged, with the ROA, profit margins, and operating margins all being just about equal and Biomet actually having a better ROE than did Interpore.

Plus, reinvestors can take advantage of one oft-noted quirk of Wall Street: Just as the Street assigns a premium price to a company about to be acquired, news of an acquisition generally brings a mild sell-off of the acquirer's shares (indeed, Biomet fell over 1% on Monday). This gives quick-thinking Fools a chance to simultaneously sell Interpore high and buy it back, as part of Biomet, low.

One side benefit of investing in companies profiled in Tom Gardner's Motley Fool Hidden Gems is that they are generally profitable and almost always small enough to make for easy acquisitions by corporate behemoths with money to burn -- thus, acquisitions at a premium are not at all unheard of. Sign up for a 30-day free trial to Hidden Gems and see what the big boys just might decide to acquire next.

Motley Fool contributor Rich Smith owns no shares in any company mentioned in this article.
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