Employee anxiety, a bribery investigation, regulatory hurdles and a less pretty Biomet, Inc. are challenging Zimmer Holdings Inc.’s CEO, Dave Dvorak as he drives the merger between the two Warsaw, Indiana orthopedic giants.
When Zimmer offered $13.35 billion for the pretty girl down the street in April, Biomet had a net worth higher than it does today. Its sales were rising faster than in the most recently reported quarter and a federal investigation of bribery charges in Brazil and Mexico put a blemish on the girl’s reputation.
Today, headlines in trade journals ask if the planned deal is in trouble. Nothing coming from the leaders of Zimmer or Biomet even remotely hint at any trouble with the deal or if any discussions are taking place to re-price the deal. Dvorak continues to tell analysts the company expects regulatory approvals in the first quarter of 2015.
But a “sense of uncertainty has crept over the economy of Warsaw, Indiana, ” said a recent New York Times article.
DeAngelis’ Advice on Musical Chairs
While the Securities Exchange Commission (SEC), European regulators and U.S. Justice Department officials grind through their legal requirements to bless the deal, the employees of the two companies continue to wait to see which chairs they will occupy when the music stops sometime in the spring.
In April 2014, well-known industry executive search consultant, Drue DeAngelis, wrote one of the 2014 top read stories in OTW as he outlined what employees of Zimmer and Biomet can expect as the companies merge. He had some personal knowledge. It was 15 years ago that he was laid off by Stryker Corporation right before Christmas, almost a year to the date of the acquisition of Howmedica Osteonics Corporation.
On December 22, 2014 DeAngelis wrote that not much has happened since the announcement of the deal, “apart from the typical script being played repeatedly that ‘it’s business as usual’ under the new Zimmer-Biomet banner.” He notes that after the transition team was announced, it appears the early “big winner” is Biomet with Adam Johnson, Dan Williamson and Dave Nolan being selected as the new Group Presidents leading the transition.”
Reductions in Force
So now what?
There will be some big announcements coming out soon, guesses DeAngelis. Those announcements, he says, will signal the next phase of the transition and the first wave of several “Reductions in Force [RIFs].” “Unfortunately, no one is protected from a RIF. All of the typical protected classes of employees are fair game during this type of transaction, so don’t assume that you are immune.”
DeAngelis says Zimmer will try to keep these episodes on as small a scale as possible to avoid a disruption in the field and mass exodus. “They will count on the self-preservation instincts of those who get ousted to ‘keep quiet and go along’ in order to receive their severance packages.”
Waves of Winners and Losers
The first wave, says DeAngelis, will be the Division Presidents followed shortly thereafter by the VP’s. “They will allow the dust to settle a bit before the next level hits the AVP’s and subsequently Sales Directors. Each layer of retained leaders will be called upon to select the next level’s winners and losers. The most obvious redundancies exist in the field but before the RIF reaches the Distributor/Branch level, there will be the thinning of sales leadership. They will endeavor to keep most of the ‘high potential leaders’ even if it means reassigning them to another role or division.”
“For some, this will mean they have to endure a demotion, but their only other option is an exit plan. Due to the obvious redundancies across the board, the leaders who make these decisions will do their best to mitigate the risks of losing business. Yet as fiercely political as this may become, this will prove increasingly challenging. Ideally by combining two companies, they hope to enjoy the ‘One Plus One Equals Two’ outcome when the dust settles. However, this takes incredible finesse to accomplish and most companies fall short of achieving it. Subsequently, their ‘One Plus One’ will most likely equal ‘Less than Two, ’ and this begs the question ‘how much less?’”
Competitor Feeding Frenzy
“Let’s face it, if you’re not kept around, you really don’t care too much about how things play out, but the business that is lost will go to those companies who stand to capitalize on this feeding frenzy.”
Employees shouldn’t expect this process to follow a logical progression of winners and losers. “If you end up on the wrong side, you shouldn’t view this as a failure. Only time will tell, but you may be significantly better off outside of the new Mega Zimmer-Biomet rather than within.”
Pure Politics
Employees also shouldn’t expect any of it to make sense.
“There will be those who are retained that make perfect sense given who’s in charge. And yet, there will be some that make no sense whatsoever. You can drive yourself crazy trying to make sense of the new organizational structure. Invariably, many of the decisions don’t make sense given the limited information that you have at your disposal. This is because you aren’t privy to the behind the scenes playbook. Some of the new appointments will simply fall under the category of ‘pure politics.’”
“The reality is that the decision making process is extremely difficult in most cases. And what makes perfect sense to one person is a mystery to another. To some it will seem random and although some will be surprised by who keeps their jobs, others will be shocked by who is sent packing. This is simply the nature of these proceedings. All the while, upper management tries to contain the damage and keep the people focused upon the goal of stabilizing the business.”
Life After ZimmerBiomet
There is life after ZimmerBiomet, says DeAngelis. “Some of you will learn that your loyalty was not valued as you would have expected and you will be disappointed if not disillusioned. Some of you will take it very personally while others will feel a sense of relief as seeing the future in the Mega Ortho company as something they never signed up for.”
His advice to employees who have been RIFed is to let the holidays pass without panicking or trying to secure your next gig. “Whenever your RIF should happen, if you are caught up in one of the waves, take a reasoned and calculated approach to finding your next job. Try not to take it too personally. I know just how difficult that is, but nothing is gained through attacking people and making a scene. Keep a positive outlook and anticipate good things to come in your near future. A fresh start and perspective may be exactly what you needed and what better time than the end of a year.”
Biomet’s Bribery Complication
While Dvorak tries to keep employees calm, Biomet isn’t making life easier for him after The New York Times reported on December 23, 2014 of “confidential documents” that said possible acts of bribery “may complicate” the deal.
An email from an anonymous whistleblower said that distributors hired by Biomet were paying “kickbacks” to government doctors in Mexico and Brazil.
Biomet reported in a July 2014 SEC filing that it had been subpoenaed by the SEC regarding “certain alleged improprieties” it had discovered in its operations in Brazil and Mexico in October 2013. Biomet disclosed the “improprieties” to the Justice Department and SEC in April 2014. The company said it had terminated, suspended or otherwise disciplined employees and executives involved.
It’s not the first bribery scandal for Biomet. Back in March 2012, Biomet entered into a deferred prosecution agreement and agreed to pay nearly $23 million in settlements with the U.S. Justice Department and the SEC over allegations that the company bribed healthcare providers in Argentina, Brazil and China.
The Times article noted that Biomet disclosed the problem to Zimmer before the merger deal. But a steep penalty for Biomet might alter the price of that deal.
Another Deferred Prosecution Deal Possible
Lawyers “briefed” on the matter told the Times that “the Justice Department has discussed the possibility of reaching a so-called deferred prosecution agreement with Biomet that would withhold criminal charges in exchange for certain concessions. Under that plan, prosecutors would impose criminal charges only on Biomet’s Brazilian and Mexican subsidiaries.”
Biomet’s Slowing Hip and Knee Sales
In addition to this newest allegation of bribery, Biomet also isn’t selling hips and knees as fast as it was when employees were still in full competition out in the field with their future Zimmer colleagues or bosses.
On January 6, 2015, Biomet announced that hip and knee sales for its second fiscal quarter of 2015 each rose by only 0.1% on a reported basis. In fact, U.S. knee sales shrank slightly. For the same quarter in 2014, knee and hip sales climbed 6.6% and 2.3%, respectively. Overall sales of $843.6 million only rose 2.2%, compared to a 4.5% rise last year. Spine revenue from the Lanx acquisition accounted for an 18.7% rise in sales. Net sales in the U.S. climbed 3.9% while European sales fell 2.7%.
Needham & Co. analyst Mike Matson said that Biomet’s growth slowed from the prior quarter in two of its three geographic regions and five of its six product categories. He thinks this could indicate that orthopedic market growth slowed and/or that Biomet lost share, possibly due to disruption ahead of its merger with Zimmer.
Wells Fargo analyst Larry Biegelsen said it was unclear whether the slowdown was Biomet-specific or indicative of a broader market slowdown. “Based on our initial checks, we believe it was likely Biomet-specific.“
Biomet also took a step back in value as its net worth dropped from $5.47 billion in May 2014 to $5.43 in November 2014.
So the girl courted by Zimmer last year is looking slightly less pretty this year. But at the end of the dance, a promise is a promise and Zimmer is still taking Biomet home.
Waste of 5 minutes.