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Stryker's $30 a Share Mako Surgical Deal Smokes Out Shorts

Stocks in this article: MAKOISRGSYK

Updated from 10:56 a.m. ET to include Gabelli comments.

NEW YORK ( TheStreet) -- Medical equipment manufacturer Stryker (SYK) said it will buy MAKO Surgical (MAKO) for $30 a share, in a deal that could smoke out short sellers of the robotic orthopedic equipment maker.

Stryker's acquisition values MAKO Surgical shares at $1.65 billion in cash, or about an 85% premium to the company's closing share price on Tuesday. The acquisition may prove to be a big boost to the credibility of makers of controversial robotic medical equipment. It also may prove painful for short-sellers who have piled into short positions in the shares of MAKO and Intuitive Surgical, given lingering questions about the safety of medical robots.

MAKO is among the most shorted stocks on the Nasdaq with 10,313,353 of its 47 million shares sold short as of September 13. That represents a short interest of about 22% of MAKO's outstanding shares. MAKO surgical shares were up over 82% to $29.39 in Wednesday afternoon trading.

For short-term MAKO shareholders, Wednesday's acquisition by Stryker comes at a significant short-term premium, however it is roughly 33% below the company's all-time share price high and comes at a time when the company has shored up its cash balances through secondary stock offerings and shown a better ability to meet its earnings guidance.

Founded in 2004, MAKO is a pioneer in robotic assisted orthopedic surgery technologies, including its Robotic Arm Interactive Orthopedic System and flagship MAKOplasty Partial Knee Resurfacing procedure. MAKO recently expanded its product offering to include the MAKOplasty Total Hip Arthroplasty, a new robotic arm application for hip replacements.

For Stryker, the acquisition is a long-term bet on robotic orthopedic surgery, according to Jeff Jonas, Associate Portfolio Manager of the Gabelli Healthcare & Wellness Trust.

Jonas said in a telephone interview that while the deal has a clear long-term rationale, it came at a significant premium and will be dilutive to near-term earnings.

The acquisition is expected to be dilutive to Stryker's adjusted earnings per share by between $0.10 - $0.12 in its first full year, neutral the second year and accretive thereafter.

"I think it is very plausible that it will be accretive in the third year," Jonas said. The Gabelli Healthcare & Wellness Trust owns Stryker shares. While the trust doesn't own any MAKO shares, other Gabelli funds do have holdings.

According to Jonas, it may take a few years for investors to see whether Stryker made a smart acquisition, given the still uncertain cost benefits of robotic surgery.

Stryker shares were falling over 2% to $69.31 in Wednesday afternoon trading.

"The combination of Stryker's established industry leadership with MAKO's innovative products and people contains the power to positively transform orthopedics," Maurice Ferré, MAKO's CEO, said in a statement. "It is with this in mind that MAKO's board of directors unanimously voted to recommend that MAKO's shareholders vote in favor of it."

"MAKO has established a compelling technology platform in robotic assisted surgery which we believe has considerable long term potential in joint reconstruction," Kevin Lobo, Stryker's CEO, said in a statement.

"The acquisition of MAKO combined with Stryker's strong history in joint reconstruction, capital equipment (operating room integration and surgical navigation) and surgical instruments will help further advance the growth of robotic assisted surgery," Lobo added.

Stryker shares fell over 2% to $69.06 in early Wednesday trading.

Wednesday's merger is subject to the approval of MAKO's shareholders and other closing conditions.

J.P. Morgan is acting as financial advisor to MAKO and law firms Wachtell, Lipton, Rosen & Katz and Foley & Lardner are acting as the company's legal advisors. Citigroup acted as Stryker's financial advisor and Skadden, Arps, Slate, Meagher & Flom served as outside legal counsel for the company.

Some notable healthcare investors hold MAKO surgical shares, according to recent filings with the Securities and Exchange Commission, including SAC Capital's embattled CR Intrinsic unit, which held roughly 2.5% of the company's shares as of June 30.

Frontier Capital Management is MAKO's largest shareholder with a 7.48% stake in the company's shares as of June 30, while other funds such as Skyline Venture Partners, Orbimed Advisors, Lumira Capital and Camber Capital Management also reported significant holdings.

-- Written by Antoine Gara in New York.

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