Strong Financials
Matson and Saxon noted that based on ConMed’s current stock price, Zimmer would likely be able to acquire ConMed from less than $4 billion, depending on the magnitude of a premium. The analysts estimated that if the acquisition closed around the end of the year, the deal would be neutral to Zimmer’s earnings per share in 2020 and begin to have a growth effect in 2021. They estimated that the deal could add approximately 50 basis points to Zimmer’s organic revenue growth, provided that ConMed can sustain its approximately 7% revenue growth.
Matson and Saxon noted that ConMed does have significantly lower margins than Zimmer. ConMed has mid-50% gross margin compared with Zimmer’s low-70% margin. ConMed also has an approximately 10% operating margin compared with Zimmer’s high-20% margin. However, the analysts predicted the opportunity for cost synergies such as consolidating plants or the elimination of public company costs.
Overall, the analysts projected that Zimmer’s acquisition of ConMed would result in relatively no change in share price in the first year, an approximately 3% increase in earnings per share in the second year, and an approximately 6% increase in earnings per share in year three. Additionally, they estimated that Zimmer’s leverage would be approximately 4x at the close of the deal if it was financed with 100% debt.
ConMed Has Considered Selling in the Past
ConMed management and board have indicated that it was open to the sale of the company in the past. In 2013 and 2014, ConMed was targeted by a group of activist investors. One of the investors, Jerome Lande, was appointed to ConMed’s board in 2014. ConMed’s current CEO, Curt Hartman, was also appointed at that time.
ConMed previously tried to sell itself in 2014. However, that sale did not go through. On July 23, 2014, ConMed published a press release stating that “the Board determined that the various strategic alternatives available at this time do not adequately reflect the intrinsic value of the Company or its future growth prospects.”
Matson and Saxon concluded, “Since CNMD had previously tried to sell itself, Jerome Lande remains on its board, its revenue growth has significantly improved, and its stock price has significantly increased, we think a sale of the company is increasingly likely in the next few years.”
Matson’s Additional Thoughts
OTW spoke with Mike Matson to get his additional thoughts on what a ConMed acquisition could mean for Zimmer.
OTW asked Matson what prompted him and Saxon to write the report. Matson explained that it began as an analytical exercise after Zimmer announced that it was thinking about doing more deals. Matson said, “Since Zimmer is a fairly large company, any acquisitions that it makes need to be large enough to move the needle. If you go down the list, there are not that many mid-cap, publicly traded, orthopedics-related companies out there. When you go down the list, ConMed is probably the one that fits the best and is most beneficial to its growth profile.”
Matson noted that, “While a company like Wright Medical would theoretically be more additive to Zimmer’s growth, that wouldn’t work out because there would likely be antitrust issues with that acquisition.”
He continued, “Another alternative would be for Zimmer to identify an earlier-stage, smaller company with rapid growth. Even with a smaller amount of revenue, it would still move the needle because it’s growing so rapidly. However, I’m not aware of any company that fits this profile.”
Matson explained how he made the ConMed connection. “What really made it click is that ConMed is half orthopedics and half general surgery. On one hand, you might think that it doesn’t fit because Zimmer wouldn’t want the general surgery business. But then it occurred to me that Zimmer CEO Bryan Hanson came from Covidien, so he knows that general surgery space very well. It’s a better market these days—the pricing pressure is not as bad—it would be an opportunity to kill two birds with one stone. Hanson would be getting a bigger sports medicine business and also gain a new business outside of orthopedics that he could expand over time, creating a new business for it that he knows so well.”
What’s Next
OTW asked Matson about the feedback he’s received on the note. While he has not heard from the companies, Matson has spoken to a few institutional investors who agreed that the acquisition made sense, that the two companies are a good fit with each other, and it would make sense for Zimmer to pursue it.
Will Zimmer management take this note into consideration and consider a ConMed acquisition? Only time will tell.
