updated 7/27/2007 9:54:16 AM ET 2007-07-27T13:54:16

Medical device maker Medtronic Inc. on Friday said it would acquire device maker Kyphon Inc. for $3.9 billion in a bid to expand its spinal products business.

Minneapolis-based Medtronic said it will pay $71 in cash for each Kyphon share, a 32 percent premium over Thursday’s closing price.

Medtronic has been best-known for its heart defibrillators and pacemakers, but its spinal business has been growing quickly, too.

The deal announced Friday would put together two companies that have focused on different parts of the spine. Medtronic has focused on spinal surgery treatments aimed at younger patients with scoliosis and degenerative disc disease in the cervical and lumbar spine. Kyphon’s focus has been on older patients who have spinal compression fractures and spinal stenosis.

Kyphon shares climbed $14.32, or 26.7 percent, to $68 in morning trading Friday while Medtronic shares fell 54 cents, or 1.2 percent, to $50.38.

Kyphon, based in Sunnyvale, Calif., had 45.6 million shares outstanding as of April 30. In addition, Medtronic said the overall deal value includes $700 million it will spend to buy shares under stock options that have vested. It will also assume $350 million in debt.

Medtronic said it would pay for Kyphon with a combination of cash and debt. Chief Financial Officer Gary Ellis said the company has about $6 billion in cash.

The transaction was unanimously approved by directors of both companies.

The deal, which is expected to close in the first calendar quarter of 2008, is expected to add to Medtronic earnings starting in the second full fiscal year after it closes.

On a conference call Friday morning, Medtronic Chairman and Chief Executive Officer Art Collins said Medtronic will keep relying mostly on internal growth, but would also look to add two to three “additional growth platforms” over the next three to five years.

Medtronic said it would ask a judge to drop a patent lawsuit between the two companies once the deal closes.

The proposed deal includes a $95 million breakup fee in case the deal falls apart.

Medtronic said it expects that its worldwide sales force will help boost overseas sales of Kyphon products.

“The benefit of this combination is the growth opportunities it provides for both organization,” Ellis said. “One plus one will be more than two as we move ahead.”

Also Friday, Kyphon said its second-quarter profit rose 16 percent to $11 million, or 23 cents per share, compared with profit of $9.5 million, or 21 cents per share, during the same period a year prior. Revenue rose 43 percent to $144.3 million from $101.1 million.

Analysts polled by Thomson Financial expected a profit of 23 cents per share on revenue of $141.1 million.

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