How a transatlantic mega-merger fell apart over a leadership tug of war
Smith & Nephew was in talks to combine with J&J’s orthopaedics unit but refused to agree to former CEO leading combined business
A deal to combine Johnson & Johnson’s orthopaedics business with Smith & Nephew to create a $34bn transatlantic medical technology company unravelled after the London-listed group refused to agree to its former chief executive leading the merged business.
Talks were at an advanced stage and both companies were aligned on the main financial terms and structure of a transaction but collapsed at the last minute after disagreement over who would run the enlarged company, according to people familiar with the matter.
FTSE 100 group Smith & Nephew refused to agree to the combined group being led by its former chief executive Namal Nawana, who left in 2019 after just 18 months in the role because the UK medical devices company could not meet his pay demands.
US drugmaker J&J had sought to install Nawana — the head of its orthopaedics division — as the merged group’s new boss. However, its smaller UK rival refused, saying it would only agree to a deal if its own boss Deepak Nath remained CEO, the people said.
Smith & Nephew chair Rupert Soames, who would have continued to lead the board, made the demand a red line in negotiations, causing J&J’s interest to cool.
The UK-listed business approached J&J earlier this year with the offer to combine with the US group’s orthopaedics division, the people said. The proposed deal valued the hip and knee replacement unit at as much as $22bn — almost double Smith & Nephew’s £9.4bn ($12.6bn) market capitalisation.
The offer came after J&J announced last year it was intending to spin off or sell the division, formerly known as DePuy Synthes, as part of a move by the $645bn company to shift focus to faster-growing areas.
At its third-quarter earnings last week, J&J’s finance chief Joe Wolk said the company was now “leaning towards” spinning off the unit as a separate listed group, crediting Nawana for a recent improvement in its performance. Sales for the division rose by 3.2 per cent over the quarter.
The merger talks reveal how close the London stock market came to another of its largest companies tilting its centre of gravity towards the US. Smith & Nephew would likely have elevated its US listing as part of the merger while retaining its London listing, some of the people said.
The companies had been eyeing a mid-October announcement before talks collapsed several weeks ago.
The proposed deal could have offered Smith & Nephew a path out of years of weak growth. It has come under pressure from activist investor Cevian and faced calls from other investors to spin off its own orthopaedics division due to poor performance.
Nath has rejected calls for a break-up and told the FT earlier this year the division was now better run. Shares in the company are down 21 per cent over the past 12 months, compared with a 13 per cent rise in the FTSE 100 index.
The two companies had agreed that J&J shareholders would own 50.1 per cent of the combined company, with Smith & Nephew shareholders owning the rest, they added. Smith & Nephew would have paid J&J a dividend of roughly $10bn to account for the discrepancy in valuations, by raising debt.
Both Texas-based Nath and Nawana have previously been embroiled in debates over executive pay. At the time of Nawana’s departure in 2019, Smith & Nephew said it had “become clear that we couldn’t meet Namal’s expectations on pay and reward, relative to what US devices companies pay”. Soames, a City grandee who is grandson of Winston Churchill, did not serve on the board during Nawana’s tenure.
The company this year cited the risk of losing another boss due to pay disparities with the US as part of the rationale for increasing Nath’s maximum deal to $15.3mn from 2027, from $7.2mn last year. That followed a major shareholder revolt over his remuneration in 2024.
J&J and Smith & Nephew declined to comment.