LONDON - Smith & Nephew PLC today walked away from its takeover battle with Zimmer Inc. for Switzerland's Centerpulse AG by refusing to increase its offer.

Zimmer said today it has noted today's announcement from Smith & Nephew. Ray Elliott, chairman, president and CEO of Zimmer, said, "We understand that the formal process still has several weeks to run, but we are pleased that our offer remains the superior one and that Centerpulse has indicated it will recommend the higher offer to its shareholders. We believe that the terms of our offer represent a compelling opportunity to maximize the value for shareholders of Zimmer, Centerpulse and InCentive by creating the No. 1 pure-play global orthopedics company. We look forward to pursuing the next steps in the process as soon as practical." Zimmer stock was up $1.85, to $49.14 at 11 a.m. today.

Smith & Nephew, the U.K. medical devices firm that put Centerpulse in play with a 2.6-billion Swiss franc ($1.93 billion) bid in March, said increasing its offer wouldn't be good for its shareholders.

The news caused Smith & Nephew's stock to surge $4.70, or 7.8 percent, to $65.05 in late morning trading Wednesday. Zimmer gained $1.70, or 3.6 percent, to $49. Centerpulse shares dropped 73 cents, or 2.6 percent, to $26.82.

Chris O'Donnell, Smith & Nephew chief executive, said, "It's a matter of value at the end of the day. Obviously our existing deal is still on the table, and it's more valuable since our announcement this morning." But when asked whether this was the end of the bid story for Smith & Nephew, O'Donnell said, "In reality, yes."

The company's initial offer remains on the table, but because Zimmer's counterbid is worth more, Zimmer is almost certain to win the battle for the Swiss firm.

Because both bids contain cash and stock elements, their values have moved since they were first made. But Centerpulse pointed out today that Zimmer's is still the higher of the two.

Most analysts had expected Smith & Nephew to raise its bid. A higher offer would have forced Zimmer to pay more for Centerpulse, even if Smith & Nephew eventually lost.

Max Herrmann, an analyst at ING Financial Markets, said Smith & Nephew's decision "caught everyone short."

The formalities of the deal are still to be completed. The Centerpulse board still has to make a recommendation, and those who already tendered their shares can change their minds. Meanwhile, the Swiss Takeover Board has said InCentive Capital shareholders, who own approximately 19 percent of Centerpulse, can vote either way, despite originally committing to Smith & Nephew.

Sources at Centerpulse said the board of directors will give its formal recommendation only when the offer period is finished Aug. 27, but they also said they will recommend the higher offer. [[In-content Ad]]