The $21.3 billion marriage between Synthes and Johnson & Johnson (NYSE:JNJ) nearly wasn’t so, background documents filed with the U.S. Securities and Exchange Commission show.
A second suitor composed of a consortium of three private equity firms courted Synthes with an all-cash deal that nearly won the Swiss orthopedics specialist’s heart.
Regulatory filings released last week expose new details about how one of med-tech’s largest mergers since before the ill-fated $27 billion Boston Scientific/Guidant deal of 2006 went down. Unlike the Boston Scientific deal, where JNJ was outbid by a competitor, this time the New Brunswick, N.J. conglomerate found itself facing a three-headed private equity monster.
Further, when combined with the fresh $6.3 billion acquisition of Kinetic Concepts Inc. (NYSE:KCI) by a private equity firm and two Canadian pension funds, the acquisition reveals a renewed focus by buyout firms on the medical device industry.
Citing "a backdrop of significant changes to the regulatory, reimbursement, pricing and tax environments driven by healthcare reform and the weak economic environment that had reduced the growth prospects of Synthes and its industry," Synthes decided to test the waters in April 2010 by offering its hand to nine strategic partners and six private equity firms.
JNJ was the only strategic partner to make an offer, and JNJ officials proposed between CHF 145 and CHF 150 per share for Synthes stock, which comes to about $154.91 and $160.26 per share using historical currency exchange rates. Synthes stock was going for about CHF 122.70 and CHF 131.00 at the time, which translates to about $131.09 and $134.00.
About 60 percent of the purchase was to be made in JNJ common stock and the rest in cash, according to the filing.
Meanwhile, a slew of private equity firms formed a consortium and offered their own bouquet of CHF 151 ($161.32) in cash in exchange for the Swish device giant’s hand.
Synthes was understandably torn. SEC filings show that the board of directors met several times to discuss the pros and cons of each offer, and even considered maintaining the status quo and remaining and independent company.
While staying single presented opportunities to focus on growth and dividends, it also meant exposure to a gloomy regulatory and fiscal climate. Saying yes to JNJ looked like a more stable option, even if its offer was lower than that of the consortium, since JNJ clearly had the capital to take the deal to the finish line. But it also meant accepting most of the payment in stock, which means a fluctuating final purchase price and value to stockholders.
Synthes also mulled over the private equity firms’ proposal. That deal likely meant less regulatory scrutiny and would probably close sooner than an acquisition by a strategic partner, but there was significant risk involved with the consortium’s ability to put together the cash to close the deal. The consortium had also posed an ultimatum in their offer: a substantial portion of Synthes board chairman Hansjörg Wyss’ equity in Synthes had to be transferred to the post-merger company.
The looming pressure of a stressed market and unsteady regulatory future pushed the company toward JNJ – but not before it upped its price to CHF 160 per share ($170.94). After some back-and-forth and due diligence reviews, the companies decided on CHF 159 per share ($169.87), with 65 percent in the form of JNJ stock and 35 percent in cash.
On April 25, 2011, the Synthes board of directors unanimously voted that the JNJ merger was a go, and on April 26 the companies took the plunge and executed the $21.3 billion merger agreement, issuing joint press releases prior to the opening of the Swiss financial markets on April 27.
