* Would be J&J's largest acquisition
* Devices and diagnostics were 40 pct of 2010 sales (Adds background about J&J, M&A in industry, comments from analyst)
By Jessica Hall
BOSTON, April 16 (Reuters) - Johnson & Johnson is in preliminary talks to acquire Swiss medical device maker Synthes for a price which could be about $20 billion, a source familiar with the situation said on Saturday.
A deal at that price would mark an 11 percent premium over Synthes' current market capitalization of about $18 billion. It would allow healthcare conglomerate J&J to further diversify its healthcare business.
However, talks could still break down, said the source, who declined to be named because the talks are not public.
The medical device sector has been consolidating as
pharmaceutical companies look to diversify away from drugs
going off patent. Other recent medical device deals include the
$5.8 billion acquisition of Beckman Coulter by Danaher Corp
Synthes shares closed up 6.2 percent in Switzerland, with traders citing market talk that the diversified healthcare company or U.S. medical device maker Medtronic Inc could be interested in buying the company.
J&J, which holds about $19 billion in cash, could not immediately be reached for comment on Saturday. "As a matter of policy we don't comment on speculation," J&J spokesman Bill Price said when asked on Friday. Synthes was not immediately available to comment.
News of the talks was first reported by the Wall Street Journal.
J&J owns some 250 separate companies under its corporate umbrella and a Synthes purchase would be its largest ever acquisition. The company attempted to acquire U.S. medical device maker Guidant several years ago, but was outbid by Boston Scientific Corp.
J&J's biggest previous deal to date was its 2006 acquisition of Pfizer Inc's consumer health business for $16 billion.
"J&J has developed a strong war chest of cash. They have the ability to do a deal like this from a size and strategy standpoint," Morningstar analyst Damien Conover said on Friday.
"This is an area where J&J would like to build strength," Conover said of Synthes, which makes spinal products and screws and plates to repair broken bones.
Medical devices and diagnostics accounted for 40 percent of J&J's $61.6 billion in 2010 sales but the business has been hit by competition and recalls.
"An acquisition of Synthes makes sense but not necessarily by J&J and not at this price," a banker not involved in with the deal said on Friday. "There's other companies it would fit better with. J&J has been looking at acquisitions for a while. It's odd that they settled on this target. I'm not sure the deal gets done."
J&J's Cypher, the first drug-coated stent to reach the U.S. market, has been eclipsed by Abbott Laboratories Xience, which is by far the market leader in the devices used to prop open arteries cleared of blockages.
The company's hip and knee replacement division has been hampered by product recalls.
J&J has also been plagued by a series of recalls in its consumer health division with hundreds of millions of bottles and packages of Tylenol, Rolaids, Motrin and other widely used products being pulled from store shelves.
Its consumer products manufacturing practices were deemed to be such a shambles that some of its plants have been placed under government supervision.
Prior to the Synthes report, there had been recent speculation that J&J was interested in buying British orthopedics company Smith & Nephew.
"There have been rumors before that J&J might have been interested in other orthopedic companies," Conover said.
"Synthes is more involved in trauma so the overlap might not be as much as with other companies, like those more focused on hips and knees," Conover said, adding that such a deal would raise fewer antitrust issues.
The potential deal is the latest in a string of international mergers in the healthcare sector, which recently saw France's Sanofi Aventis> acquire U.S. biotech company Genzyme and Canada's Valeant Pharmaceuticals International make a hostile bid for Cephalon Inc.
Synthes' Chairman Hansjorg Wyss is the second-richest person in Switzerland with a net worth of $6.4 billion, according to Forbes. (Reporting by Jessica Hall in Boston; writing and additional reporting by Megan Davies in New York; additional reporting by Bill Berkrot in New York and Silke Koltrowitz in Zurich; editing by Bill Trott)