By Joseph Walker, Jack Nicas and Lauren Pollock
WARSAW, Ind.--A $13.35 billion deal to combine two
medical-device makers was big news on Wall Street Thursday--and
also in this 14,000-person city where both companies are based,
which proudly calls itself the "Orthopedic Capital of the
World."
Zimmer Holdings Inc.'s agreement to acquire crosstown rival
Biomet Inc. "was shocking news to the whole town," said Rocky
Clemens, owner of the Time Out Inn, a popular watering hole for
Zimmer workers. "Everyone is worrying about their job," he said.
"Will there be a downsizing? That's the big question."
The deal, which has been approved by both companies' boards,
positions Zimmer, based in Warsaw since 1927, to become the second
largest company by revenue in the $45 billion global market for
artificial knees, hips and other orthopedic and bone-mending
implants. The acquisition price, which includes the assumption of
debt, consists of $10.35 billion in cash and $3 billion in Zimmer
shares. Biomet had $5.83 billion in debt as of Feb. 28. The deal
ends privately held Biomet's plans for an initial public offering
in the spring.
And it means this small city will have one less employer in an
industry whose local roots stretch back more than a century. In
addition to Zimmer and Biomet, medical-device maker DePuy
Orthopedics Inc., a Johnson & Johnson subsidiary, is also based
in Warsaw. The industry got its start here in 1895 when DePuy's
founder, a Canadian pharmacist named Revra DePuy, came up with the
idea of making flexible splints to replace the wooden barrel staves
then used to set broken bones. The company he created eventually
spawned others, as people left to start competing firms.
The Zimmer-Biomet merger is the largest in the medical-devices
industry since Johnson & Johnson purchased Synthes Inc. for
$21.3 billion in 2012, and highlights the desire of device
companies to cut costs and become more efficient in the face of
pricing pressure from hospitals, combined with lower
surgical-procedure volumes because of consumer uncertainty about
the economy, analysts said.
Uncertainty also abounds here in Warsaw. Tony Clark, a Zimmer
factory worker drinking a Busch Light at the Time Out after his
shift, said he heard about the merger over the radio shortly after
he arrived at work on Thursday. "Then I pulled up my email and saw
the letter from the CEO. All I thought was, 'That's a lot of
money,' " he said.
His friend, Charlie Miller, whose family rents a home to Mr.
Clark, chimed in: "Yeah, I saw $13 billion and thought, 'We got to
raise your rent. You must be making more than we thought!'"
Warsaw Mayor Joseph Thallemer received a separate email Thursday
morning, from Zimmer Chief Executive David Dvorak, informing him of
the merger, and pledging that the combined company would maintain
its headquarters in the town. Soon after, Dr. Thallemer, who is
also an optometrist, met with one of his patients, a Biomet
engineer. "We had a nice long discussion along the lines of, 'What
does this mean to me?'" said Dr. Thallemer.
Local Chamber of Commerce President Mark Dobson said Warsaw is
one of the nation's last company towns, a "microcosm of 1950s
Detroit," where manufacturing workers with a high-school education
are able to live middle-class lifestyles. Some 21% of workers in
Kosciusko County, which includes Warsaw, were employed in
medical-equipment and supplies manufacturing in 2012, up from 19%
in 2007, according to data from the Bureau of Labor Statistics. The
average annual salary of workers in the industry was $80,300,
compared with $44,600 across all industries in the county.
Zimmer's Mr. Dvorak said the combined firm would go through a
"methodical planning process" to "retain the best talent in both
organizations." He said the merged company would "work very hard"
to maintain its sales employees and skilled production workers, but
said there would likely be opportunities to reduce costs in other
areas. Zimmer said it expects to realize cost synergies of $270
million annually by the third year after closing.
The combined company, to be led by Mr. Dvorak, will have a wider
product portfolio as it looks to take more market share from
competitors including Stryker Corp. and DePuy. Hospitals have
increasingly sought to extract price discounts by shifting more of
their purchasing volume to one or two device companies.
Biomet, formed in 1977 by a group that included former Zimmer
employees, is known for its informal corporate culture. Biomet
employees often wear jeans to work, whereas Zimmer's corporate
reputation is "suit and tie," said Rod K. Mayer, chief executive of
Nextremity Solutions Inc., a Warsaw-based medical-devices company.
Mr. Mayer said that the merger was the main topic of conversation
among tables at the Noa Noa Wood Grill & Sushi Bar, a popular
downtown restaurant, where Biomet Chief Executive Jeffrey Binder is
known to be a frequent patron.
Biomet was acquired in 2007 for about $11.3 billion by
Blackstone Group, KKR & Co., TPG and Goldman Sachs Group Inc.'s
buyout arm. Biomet's private-equity owners invested more than $5
billion in the 2007 takeover, dividing ownership of the company
equally, said people familiar with the deal. Some of the buyout
firms have since sold off portions of their investment to others,
one of the people said.
The Zimmer deal today values the owners' stakes in Biomet at
roughly 1.5 times their original investment, the people said. Such
a return, while profitable, is lower than the typical aim of a
private-equity firm. The buyout firms believe the investment could
be worth more than double the original amount over time as Zimmer's
stock rises, one of the people said.
Bobbi Presson, a 47-year-old temporary worker hustling to her 2
p.m. Zimmer shift while swinging a big plastic mug bearing the
company's "Z" logo, said she felt "sorry for Biomet." Zimmer has
been moving heavily to temp workers in recent years, she said, and
"they're going to do the same thing to" Biomet.
Not everyone in Warsaw is worried about the merger. Sam Lozier,
a robotic finisher at Zimmer--"I polish knees," he said--was
cleaning his thick wire-rimmed eyeglasses in the driver's seat of
his red Chevy pickup in Zimmer's parking lot Thursday, about to
start his shift. "I like my job. I'm very well paid," he said. To
him, the purchase of Biomet means "we're still growing, and that's
a good thing," he said. There is always concern among employees of
outsourcing jobs, but the purchase of Biomet "isn't going to make
that big a difference," he said.
Mr. Lozier's brother works at Biomet, and his son works at
DePuy. "If you live in Warsaw, someone in the family is going to
work at one of them," he said.
Mike Spector contributed to this article.
Write to Joseph Walker at joseph.walker@wsj.com, Jack Nicas at
jack.nicas@wsj.com and Lauren Pollock at lauren.pollock@wsj.com
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