And Biomet played hard-to-get, pursuing plans for an IPO until very late in the game and holding out for a higher valuation from Zimmer, according to the filing, which offers a detailed look at exactly how the deal went down.
Biomet had been on Zimmer’s radar as part of its periodic due diligence, but as Biomet prepped the IPO in late 2013 Zimmer’s board authorized CEO David Dvorak to approach his counterpart at Biomet, Jeffrey Binder. Biomet’s board directed Binder to pursue the twin tracks of an IPO and a possible merger with the 2nd suitor, named only as "Company A" in the filing. Binder met with Company A’s CEO Dec. 23, 2013, to "discuss exploring potential collaborative opportunities," according to the filing.
After the holidays Dvorak called Binder to gauge the depth of interest and asked for an in-person meeting. The pair met Jan. 9, with Binder remaining coy about a tie-up but saying Biomet would entertain an offer if the valuation was high enough. In the meantime Biomet continued with its plans for an IPO, according to the filing. Ten days after the meeting between Dvorak and Binder, Zimmer’s board authorized Dvorak to make a bid valuing Biomet at $11 billion to $12 billion, the filing shows.
Dvorak made that offer to Binder Jan. 21, but Biomet’s board concluded that the valuation was too low.
"The [Biomet] board of directors also noted that even if Zimmer and [Biomet] were able to reach an agreement on valuation, the [Biomet] board of directors would only be willing to pursue a transaction that provided [Biomet] with significant certainty of closing," according to the filing.
But the deal wasn’t dead; during the 1st week of February the companies’ financial advisors, Credit Suisse for Zimmer and Merrill Lynch for Biomet, met to discuss a potential deal. Merrill Lynch relayed that a $12.5 billion to $14 billion valuation sounded about right, according to the filing, and stressed that Zimmer would have to bear the burden of passing regulatory hurdles.
At this point Company A had already bowed out, with its CEO telling Binder that it "had several internal projects on the horizon for 2014 and was not at that time prepared to engage in discussions with [Biomet] regarding a potential business combination transaction," according to the filing.
On the last day of February Zimmer’s board approved a revised offer of $12.75 billion, with $9.75 billion in cash and $3 billion in ZMH shares. Dvorak made that offer to Binder March 5; keeping the pressure on, Biomet filed its S-1 IPO registration with the SEC 2 days later. After some deliberation, Biomet’s board told Binder to deliver a counter-offer: a $13.35 billion valuation, with $10.1 billion in cash and $3.25 billion in Zimmer stock.
Zimmer countered the counter-offer March 21, saying it would pay the $13.35 billion price, but altering the cash-stock balance to $10.35 billion in cash and $3 billion in shares. Biomet responded by demanding more assurances from Zimmer, according to the filing.
"After an extensive discussion, the [Biomet] board of directors directed Mr. Binder to convey to Mr. Dvorak that while the board appreciated Zimmer’s efforts to bridge the valuation gap, Zimmer would need to confirm that it was willing to pursue a transaction on the basis of certain key transaction terms [Biomet] had proposed in order for the board to authorize further discussions with Zimmer regarding a potential business combination transaction," according to the filing.
After Zimmer agreed to negotiate over Biomet’s demands, the companies went under agreement and opened their kimonos for a month of due diligence. On April 6 Biomet said the terms of the negotiated deal "significantly departed" from Biomet’s proposal.
"After extensive discussions, the [Biomet] board of directors instructed Mr. Binder to terminate discussions with Zimmer until Zimmer was able to assure Mr. Binder that it was willing to move forward with discussions on the basis of the key transaction terms [Biomet] had proposed as described by Mr. Binder to Mr. Dvorak on March 16, 2014 and March 23, 2014," according to the filing.
After Zimmer acceded, the deal was back on and negotiations proceeded – with Biomet amending its IPO filing April 14 – until the merger agreement was signed April 24.
The deal has since come under the scrutiny of Japanese anti-trust regulators, the U.S. Federal Trade Commission and the European Commission. If consummated, it would create the world’s 2nd-largest orthopedics business after Johnson & Johnson‘s (NYSE:JNJ), with combined annual sales of roughly $8 billion.