Zimmer Agrees to Buy Biomet for $13.35 Billion

In a stunning move, cross-town rivals Zimmer Holdings, Inc. and Biomet, Inc. have agreed to combine in a transaction which is valued at just over $13 billion and will affect the work lives of more than 14, 000 employees and create a company with combined annual revenues of about $8 billion.

This transaction further consolidates the orthopedic industry as it puts together the #2 player (Zimmer) with the #4 player (Biomet) and reduces the number of major, diversified orthopedic implant and instrument companies from 5 to 4.

The last time Biomet was “acquired” occurred seven years ago in 2007 and the price tag was $11.4 billion.

The purchase will be paid in a combination of stock and cash. The deal is expected to close in the first quarter of 2015 and when the dust settles, Biomet shareholders will own about 16% of the combined companies.

The initial reaction from Wall Street’s analysts is positive.

Reasons for the Acquisition

In a conference call with Wall Street’s analysts this morning, Zimmer’s CEO David Dvorak said that there were four basic strategic growth reasons for the deal:

1. The combined companies will be more competitive with DePuy (JNJ), Stryker Corporation, Smith & Nephew and the other emerging suppliers of orthopedic implants. Indeed, on a combined basis the new company will have about 42% and 35% share of the worldwide knee and hip market, respectively.
2. It will improve the diversified portfolio of products for Zimmer. For example, the transaction doubles Zimmer’s spine and dental product revenues.
3. It expands the innovation platform. Combined, annual R&D spending jumps to $360 million.
4. And Zimmer points to emerging markets where, in certain instances, Biomet had a sales and distribution presence and Zimmer did not.

From Biomet’s perspective, the company had filed to “go public” and was, in effect, already marketing itself to prospective buyers. It turned out there was one big buyer sitting just down the road named Zimmer. And, frankly, these two Warsaw, Indiana-based firms are deeply rooted in a common culture, a common geography, a shared value set so that their combination may well feel to employees and other stakeholders as if it was somehow pre-ordained.

Early Surgeon Reaction

To a certain extent, this merger won’t change the day-to-day work of orthopedic physicians. But an increasingly consolidated industry does raise some concerns as well as opportunities as these top surgeons related to OTW this morning upon hearing the news.

From Javad Parvizi, M.D., FRCS, vice chairman and director of clinical research at the Rothman Institute at Thomas Jefferson University: “The Zimmer-Biomet merger is an interesting development that might provide new opportunities for some orthopedic surgeons that have been working with each of these companies. With such an infrastructure, there could be a real benefit in terms of education and research. The disadvantage—as with any merger—is that it could take away competition between the companies that is clearly useful for developments and progress. Lack of competition may lead to complacency and may deprive others from working with each company individually.”

From Tom Errico, M.D., chief division spine surgery, departments of orthopedic surgery and neurosurgery at New York University; “Zimmer was very interested in expanding its spine offerings and looked at a lot of companies. This is a huge leap for them and puts them squarely in the game in a positive way.”

What Now?

Over the next 8-10 months the lawyers, bankers and management teams at both companies will be combining the two companies. The whole mash up, Dvorak expects, will be done in the first quarter of 2015. In its first year, Zimmer’s accountant think that there will be about $150 million of savings from “synergies.”

Here are some data points from Zimmer’s conference call this morning.