The Affordable Care Act was signed into law on March 23, 2010. Among its provisions were a new device tax and a series of programs which, in their entirety, would apply additional pricing pressure to medical device products in the United States.
One year earlier, Synthes had settled two unprecedented legal entanglements—claims of financial conflict of interest from the state of New Jersey and felony charges of shipping adulterated and misbranded products—Norian XR. Four of its senior executives would eventually be sentenced to prison sentences ranging from five to nine months.
Against this backdrop of legal, regulatory and pricing pressures, in 2010 Synthes’ board asked its controlling shareholder and CEO, Hansjörg Wyss if he’d be willing to explore the sale of the company. He said “yes.”
Today, 76-year-old Wyss is retired, Synthes is called DePuy Synthes Companies and whole generations of Synthes managers are wealthy.
From AO to Synthes
The organization that would eventually become Synthes started in 1960 as a trademark of the non-profit Arbeitsgemeinschaft fur Osteosynthesefragen (Association for the Study of External Fixation, AO/ASIF). Its products were originally made under license by its partners, Straumann Group and Mathys.
In 1975 Synthes USA, the company founded by Hansjörg Wyss, became the third company to form an alliance with AO/ASIF. In those days Synthes USA was primarily a marketing and sales organization. Straumann and Mathys were suppliers to AO Synthes ASIF.
In 1990 Straumann spun off the implant business into an independent privately owned company, Stratec Medical. Later Stratec partially listed its shares on the Swiss Exchange and, three years after that, Stratec and Synthes USA merged to form a new, public firm named Synthes-Stratec.
Post-merger, Hansjörg Wyss became Synthes-Stratec’s largest shareholder. In 2004, the final third of the original AO/ASIF partner companies, Mathys, sold its osteosynthesis business to Synthes-Stratec. The company subsequently dropped the “Stratec” suffix to become simply Synthes.
In 2006 Synthes acquired the rights to the Synthes brand name and most of the related intellectual property including patents from the AO/ASIF foundation for around 1 billion Swiss Francs.
By 2010, Hansjörg Wyss had been running Synthes for more than 35 years and had grown it to an annual revenue base of $3.7billion, 11, 400 employees in 42 countries.
But times were changing.
Synthes Approaches DePuy
Amin J. Khoury, 13-year member of Synthes’ board and one of its ten independent directors drew the short straw and began to assemble the team to stealthily shop Synthes. Credit Suisse acted as financial advisor and pretty quickly had assembled a short list of nine potential acquirers/strategic partners. Among the names was Johnson & Johnson but also, we expect, Boston Scientific Corporation, Medtronic, Inc., Smith & Nephew plc, St. Jude Medical, Inc., Stryker Corporation and Zimmer Holdings, Inc.
So, starting in mid-September 2010, Credit Suisse contacted the targets. Five turned Synthes down. Four began to kick the tires. Then one more dropped out. Early on Johnson & Johnson emerged as the leading contender. Two weeks after expressing interest (on September 27), JNJ sent Alex Gorsky, vice chairman of Johnson & Johnson executive committee and Mike Mahoney, worldwide chairman of Johnson & Johnson’s medical diagnostics and devices group to meet with Hansjörg Wyss.
At that first meeting a picture of the blockbuster combination was sketched out. The next day, Aileen Stockburger, DePuy’s vice president of worldwide business development and Susan Morano, JNJ’s vice president of new business development for medical devices, called into a conference call with Synthes’ bankers and set out a process for getting these two leviathan companies—DePuy and Synthes—to quietly court.
Right away, the fact that there was almost no overlap between companies and product lines opened up clear business combination lanes and fueled initial momentum for both sides.
Events moved fast. Two weeks after Stockburger and Morano talked with the Credit Suisse team, Peter Batesko, III, DePuy’s chief financial officer and Michael Ullmann, general counsel for JNJ’s medical device group joined the original DePuy group to meet with Synthes’ President and CEO Michel Orsinger and CFO Robert Donohue.
Game On
Over the next five weeks DePuy’s team went into deep due diligence mode and began to, first, take apart on paper the Synthes global enterprise and then, with DePuy in mind, recombine under the DePuy structure. Because the combination was rich in complementary products and almost devoid of overlap, this process moved along well. By mid-November 2010, it was clear there could be a deal under the blizzard of paperwork.
Time for the top guys to dosey doe back in.
On November 21, 2010, Bill Weldon, JNJ’s overall chairman of the board and CEO formally reviewed the details of a merger with Synthes’ Khoury. Three weeks later Hans Wyss, Orsinger and Dr. Robert Frigg, chief technology officer of Synthes, met to map out the post-purchase structure of Synthes in JNJ’s medical device unit with Mahoney, Gorsky, Ullmann and Stockburger.
Probably the biggest point was a relic of the convoluted founding of Synthes—the AO Foundation, which was both a non-profit institution and a minority shareholder of Synthes.
Secret Private Equity Negotiations
As strong as the meetings were with JNJ, running in the background was a quiet and concurrent effort to contact six private equity firms which might ultimately compete with JNJ to acquire Synthes. Two said “no” and four bellied up to the bar, signed non-disclosure agreements and started to perform their own due diligence.
One day after Hans Wyss met with JNJ’s merger team, three of the private equity firms submitted non-binding proposals to acquire Synthes at prices that ranged around CHF 150 per share ($17.9 billion)—100% cash. The three new bidders told Synthes that the size of the deal would require them to syndicate the deal to other private equity firms. The last remaining private equity bowed out.
JNJ’s Gorsky talked to Hans Wyss two days later (December 15) and told Wyss that JNJ was ready to make an offer.
No one else submitted a proposal.
It was now down to two bids. Private equity at $17.9 billion all cash. And JNJ.
JNJ’s Low Ball Bid
JNJ’s Gorsky called Khoury five days before Christmas with an offer (non-binding) of CHF 145-150 per share—BUT, more than 60% of the price would be paid in the form of Johnson & Johnson common stock, and was subject to, among other things, satisfactory completion of due diligence and negotiation and execution of mutually acceptable transaction agreements.
This was clearly inferior to the private equity offer.
Khoury asked Gorsky to send the proposal in writing—which he did on the 23rd.
Now the process between Synthes and JNJ slowed down.
Gorsky, perhaps sensing that the non-binding proposal hadn’t exactly been met with popping champagne, asked his counterpart at Synthes for a timeline for a response. Hans Wyss answered. The board was thinking about it and would answer in the coming weeks.
Christmas came and went. New Year’s parties came and went. In mid-January 2011 Hans Wyss and Amin Khoury met in London with the three private equity firms and gave them the green light to form a consortium to buy Synthes.
Bill Weldon, perhaps hearing that the deal was moving away, called Synthes’s Khoury and said, in effect, that JNJ was still very interested in Synthes at the CHF 145-150 ($17.6 billion) range.
But Hans Wyss and Khoury kept working on the private equity deal. On February 8 and 9 they met in Boston with each of the three private equity firms and received a new, higher bid for Synthes. Now the price was CHF 151 per share—cash. But, in a new wrinkle, the private equity firms set a condition that Hans Wyss, Synthes’ largest shareholder, would be required to convert most of his Synthes stock into stock in the post-merger company.
Decision Time
The next day (February 10) Wyss and Khoury attended a previously scheduled meeting of the Synthes board. It was decision time. They had three basic choices. Don’t do anything. Maintain status quo. Grow Synthes with acquisitions or merge with another company, like JNJ.
Doing nothing, the board decided, would continue to expose Synthes to the negative effects of changes to the regulatory, reimbursement, pricing and tax environments driven by healthcare reform and the weak economic environment.
Alternatively, growing Synthes through acquisitions was appealing but, so far, Synthes hadn’t found attractive targets.
That left a sale. To Johnson & Johnson. Considering that it could pay shareholders a premium (about 25%) and might actually improve Synthes’ operating performance if, as contemplated, they were part of a company like JNJ, the board came to the conclusion that it really had no other choice.
With that, the board asked Credit Suisse to, again, review the suitors. On one hand the private equity firms were offering cash. But could these three firms and their allies raise the cash? That, the board concluded, depended on favorable capital market conditions—a slender reed to lean on, for sure.
But the final factor pushing Synthes’s over to JNJ was that JNJ was so familiar and comfortable with Synthes’ business and vice versa. The private equity firms would have to do a substantial amount of due diligence. As the discussions leading up to the non-binding bids demonstrated, JNJ’s team could move fast because they understood Synthes’ business.
Next Week: Khoury asks Weldon to raise the bid and Mahoney balks at Synthes exec payouts.
