Lessons in M&A

Merger & acquisition activity picked up slightly in 2013, with Stryker’s purchase of MAKO Surgical and Biomet’s of Lanx as just two of the recently noteworthy deals. To better understand the resources involved in searching for and completing an acquisition, BONEZONE spoke to two companies that have grown (and in one case divested assets) this year.

Ken Reali became President and CEO of Baxano Surgical after his company, Trans1, acquired Baxano in 2Q13.

Wright Medical acquired BioMimetic Therapeutics and Biotech International and divested its OrthoRecon business this year. Lending perspective are Lance Berry, Senior Vice President and CFO of Wright Medical, and Ted Davis, President of Wright Medical’s OrthoRecon division. Mr. Davis will maintain the helm of the division for MicroPort Orthopedics when the transaction is complete.

BONEZONE: Mergers and acquisitions require great human and capital resources. What have you dedicated specifically to M&A activity? Are these internal or external resources?

Ken Reali, Baxano Surgical: Our initial screening of potential candidates to acquire is all done internally. We have a set of filters and criteria that we put together. Our vice president of business development puts potential candidates through the filter to see what comes out at the end. That’s how we focused on the Baxano acquisition. Obviously for a company our size, a lot of acquisitions aren’t going to make sense.

Much of that initial upfront work was internal. For a company our size, once you’ve decided there is a potential deal, that’s when you engage external resources. So a legal firm and certainly a banker are both needed to help structure the deal and sometimes, help negotiate.

Lance Berry, Wright Medical: We use a mix. We have internal and external resources, and the mix varies depending on the size of the deal. We have two people internally who focus exclusively on merger and acquisition activities, and then we have a core team of internal people across the various functions of the business whom we mobilize to perform due diligence and evaluate opportunities. Depending on the situation, we supplement that team with external experts. Maybe a particular acquisition needs regulatory expertise; you would go find that expertise, as an example.

We have two people who spend their full time working on this, so there’s a lot of time spent just on identifying and evaluating potential opportunities, the vast majority of which don’t turn into anything. Frequently you’ll evaluate opportunities multiple times over a number of years as your company changes, and that particular opportunity changes. We’ve found it’s really important to have people who focus on this the whole time, understand the landscape and develop relationships.

BONEZONE: What are the backgrounds for those on your internal M&A team?

Berry: One has an engineering background. He’s been in medical device research and development for a number of years, in everything from startup to very large medical device companies. We have another individual who has more of a general business background. He has an MBA and has done various forms of healthcare consulting, so he has very broad healthcare experience.

BONEZONE: Companies have had to run leaner in recent years. How do you determine allocation of resources for business development?

Berry: Business development activities can help companies in a number of ways; specifically, we wanted activities that would increase our topline growth. Therefore, we focused our efforts on the parts of the business that had the greatest topline growth prospects, which most recently have been the foot/ankle and biologics markets. It all starts with: What are your overall business goals, and how does business development accelerate those goals?

Davis: We developed a product strategy and a portfolio strategy. By having that focus and knowing where you want to hunt, you can carve out the distracting areas and quickly move on. If you’re focused and have a strategy, it’s a straightforward process and everybody on the team builds that knowledge base. That makes a big difference.

Some companies just wait for opportunities to come to them. It’s very difficult then to know when to say no. We know very clearly when to say no to opportunities.

Reali: We’re very careful. Our vice president of business development is also our head of international sales, so he has two hats in this organization and that’s to maximize our headcount.

We’re at 140 employees now. I look at business development as somewhat of a luxury, but it’s a necessity, because you don’t want to miss opportunities. You play around the basket enough where sometimes you find those opportunities like the Baxanos, but you have to be playing around the basket to find them. That takes effort to filter through opportunities and look at companies and have communication. That’s all we did.

I would say business development is 50 percent of our vice president’s job. That was how we allocated his time, and it was enough, because we put in strong filters that were not looking at everything under the sun, but rather looking at very specific companies that fit these strict criteria.

BONEZONE: How specific is the criteria that you set?

Reali: The strategy that we put in place a few years ago when we were Trans1 was very specific to growing beyond our one technology, AxiaLIF, to other minimally-invasive technologies that appeal to the spine surgeon performing minimally-invasive spine procedures. One of the criteria is, ‘Do the technologies that the company we’re interested in fit within our portfolio, and fit with the vision, mission and direction of the company?’ That is a very important filter. Then it comes down to the economic feasibility both on our side and theirs, meaning do they want to be acquired, what is their financial situation, how can we structure a deal that will fit into our financial situation. All of those things need to be fully understood.

BONEZONE: What advice do you have for others on evaluating the potential of each M&A opportunity?

Reali: Certainly the classic business school definition, as you look at adjacencies. You have to be careful and realistic. We did a lot of our own homework, researched the market, talked to surgeons and understood whether this new portfolio of products that we have with the acquisition of Baxano was indeed synergetic. We were careful to qualify and quantify that through surgeon interviews.

I think companies can get too ambitious and look too far beyond where they are today. You have to be realistic, thoroughly understand your current customer base, know what an acquisition can do for you in terms of being able to cross-sell new products to current customers and know how it can expand your customer base.

Berry: If the acquisition is heavily product-driven, you want to understand whether it’s the technology that you think it is. Is it the intellectual property that you think it is? Frequently with medical devices, regulatory plays an important role both inside and outside of the U.S. Compliance with healthcare laws is important, too, inside and outside of the U.S. Then, it depends if the company has a meaningful amount of revenue, how that distribution network fits with your current distribution network. Those are examples that vary from deal to deal.

Davis: Areas that can make a deal easy or hard to do are the quality systems and document controls that are required. These touch regulatory approvals inside and outside the U.S. When you look at some of the smaller companies, single acquisitions, it’s pretty straightforward to revamp it. If you’re acquiring a larger entity that has its own quality system, you have to figure out the path to operate in their quality system until you’re fully integrated. That’s an area where, depending on the size of the asset, it dictates the amount of time you spend in that area. At the end of the day, it’s not just doing the deal, but integrating afterward.

BONEZONE: What lessons have you learned from completing acquisitions? What might you have done differently?

Reali: It always takes longer than you think it does. If you think it’s going to take a certain amount of time, double it. Integration—no matter if it’s two small companies or two larger companies—is always challenging and harder than you think it’s going to be.

Finally, you make a lot of decisions in the fog of integration. You can’t be afraid to go back when you have more information a couple months later and make changes or correct decisions that you realize were probably the wrong ones.

Berry: Your communication plan is critical to your success. Have that in place and ready to go the minute you make an announcement and focus on executing that right away. I believe our communication team here has done a fantastic job since the announcement of the MicroPort transaction, and that really has made everything go much smoother.

There is a lot of work to be done between announcement and close, which is the case typically with any transaction. You need everyone to be engaged and working together to get things done. I think it goes back to well-thought-out and well-executed communication.

Davis: We’ve done more than 30 deals on the buying side. When we bought BioMimetic, it was the exact same strategy and communication plan: What’s our communication plan to the sales team? What’s our communication plan internally to our team? Again, we had a pretty good view of what we needed to do to make it a successful announcement, and we learned a lot from the previous deals we’ve done.

Save Supplier