Would ConMed Corporation be a good acquisition for Zimmer Biomet? Two top Wall Street analysts, Mike Matson, CFA, and David Saxon, CFA, think that it’s a logical combination.
Matson and Saxon, who are analysts at Needham & Company, LLC, sent a note to their clients explaining why they thought that ConMed would be a good fit for Zimmer. While they made a strong case for their suggestion, they also made it very clear that they were engaging in a “purely hypothetical exercise on our part and not in response to any news or speculation of a potential deal.”
Here are some of the highlights from that note and OTW’s subsequent discussion with Mike Matson.
Zimmer’s Management Has Hinted at M&A Focus
Matson and Saxon noted that Zimmer management has indicated that it plans to focus more on M&A in 2020 and beyond as its free cash flow improves and its leverage ratio declines. Zimmer entered 2019 with a leverage ratio of approximately 3.2x. Zimmer management also previously noted that it was open to smaller “tuck-in” deals that could be integrated into is existing distribution channels.
Matson and Saxon estimated that Zimmer’s weighted average market growth rate is approximately 3% and think that it will need to acquire higher growth assets to increase that growth rate.
ConMed Would Be a Strategic Fit for Zimmer
Zimmer Biomet is a publicly traded medical device company headquartered in Warsaw, Indiana. It designs, manufactures, and markets orthopedic reconstructive products; sports medicine, biologics, extremities and trauma products; office-based technologies; spine, craniomaxillofacial and thoracic products; dental implants; and related surgical products.
ConMed is a Utica, New York-based global technology company that has two businesses: Orthopedic surgery and general surgery. Matson and Saxon noted that ConMed’s orthopedic surgery products would strengthen Zimmer’s existing sports medicine and powered instrument businesses.
Specifically, they noted that Zimmer’s acquisition of ConMed would:
- increase Zimmer’s share in the mid-single digit growth sports medicine market
- broaden its sports medicine product portfolio
- expand its powered instrument portfolio
- allow for cost synergies because of the existing overlap between the two businesses
The analysts also noted that while ConMed’s general surgery business is outside of orthopedics and does not have much overlap with Zimmer’s existing businesses, it could be a starting point for diversifying Zimmer’s business into markets that have better pricing and volume. Additionally, Zimmer CEO Bryan Hanson has extensive experience in this area.
Hanson joined Zimmer after serving as a member of Medtronic’s Executive Committee and as the Executive Vice President of Medtronic’s Minimally Invasive Therapies Group, where he was overseeing and providing strategic direction to its approximately $9 billion business. Hanson previously served as Group President of Covidien’s Medical Devices business where he transformed two of Covidien’s largest divisions (Energy-based Devices and Surgical Devices) into a single global business unit.
