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?
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.
Three M&A Trends
With 29 mergers and acquisitions finalized or announced thus far in 2013, the orthopaedic industry is one of a few bright spots in the overall M&A market, which has experienced a sharp decline this year. The trend will continue as the orthopaedic industry is expected to consolidate on both OEM and supplier sides, says Robert J. Kinsella, President of Kinsella Group, a middle-market investment bank and business advisor. Kinsella outlines three M&A trends he expects will carry over to 2014.
Cross-border activity. U.S. companies are purchasing ex-U.S. companies to enter Chinese and European markets faster and grab more market share. Notable examples are Stryker’s acquisition of Trauson and Wright Medical’s purchase of Biotech International. Kinsella says he expects more ex-U.S. companies to acquire U.S. companies and divisions, as well. “We think the cross-border activity is going to increase, and it’s going to increase significantly,” he says.
Spine company consolidation. Ten companies controlled approximately 94 percent of the estimated 2012 sales in the spine segment, according to ORTHOWORLD’s SPINE MARKET REPORT. “There are about 180 spine companies that are below $20 million and above $5 million,” Kinsella says. “I can’t see how those companies can survive long term. There will be a lot of consolidation that will occur.”
Opportunities in extremities. The extremities market grew by three percent in 2012 and is expected to remain a strong segment of the industry, according to ORTHOWORLD’s ORTHOPAEDIC INDUSTRY ANNUAL REPORT®. “The move toward extremities is no secret,” Kinsella says. “We think that is going to continue, and we think there is a lot of M&A opportunity for extremity companies.”
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.