Alex Sawyer
Case review
Zimmer Holdings

This case article is about a company called Zimmer Holdings, an orthopedic devices firm located in northern Indiana. The article starts off in 2003 and takes place in Singapore where the CEO Ray Elliott, and executive vice president Sam Leno receive news that Smith & Nephew plc, as acquired a Swiss firm Centerpulse. This came to a shock to Zimmer Holdings because they had offered to buy Centerpulse in 2002 but the offer had been declined. There is a Swiss law stating that any company takeover could be countered if a bid is placed within 40 days of the announcement of the takeover. Elliott and Leno have the option of placing a bid on the company they once tried to acquire yet were declined.

The orthopedics industry is aimed at helping victims of any type of bone and joint disease or disorder. They reconstruct the bone or joint by inserting a prosthetic to replace the surface. Knee, hip, shoulder, spine and trauma treatments have allowed the orthopedics industry to be profitable and have shown a rise in the past few years. The dental prosthetics are also on the rise creating a niche segment within the industry.

Within the past decade there has been a rise in surgical procedures performed in the United States. Osteoarthritis affects nearly 190 million people in the U.S. which is can affect joints and in some cases lead to surgery. We can see that the trend of holding an active lifestyle can lead to a demand for prosthetics because of the wear and tear on our bones and joints. This in turn expands the market segment for companies in the orthopedics industry. A typical orthopedic surgery costs between $10,000 and $20,000 which is usually paid by private insurance companies or government insurance, such as Medicare and the costs are increasing. The top orthopedic companies were bringing average annual revenues of $9 billion in 2002 and some of the top companies had their headquarters located in Warsaw, Indiana, which is where Zimmerman Holdings is located.

Research and development is very important in the orthopedic industry being that they have a need to constantly be coming up with better products. The industry leaders tend to invest somewhere around 5% of their sales dollars to research and development. This is important to companies in the orthopedic industry because the new technologies can help the implants last longer and perform better.

Zimmer Holdings started in 1926 where Justin Zimmer worked as a splint salesman in Warsaw, Indiana. He was very successful starting at his first year in business introducing new products and raising his company’s revenues. Bu 1972, Zimmer Holdings was acquired by Bristol-Myers which was a pharmaceutical company who brought great value to the company allowing it to grow internationally. Bristol-Myers joined with the company Squibb and became one of the top 10 pharmaceutical companies in the world. In 2001, Bristol-Myers Squibb decided separate Zimmer as its own orthopedic division allowing it to be publically traded. In July of 2001, Zimmer holdings had appointed Sam Leno as senior vice president as well as chief financial officer being that over his 30 year career he had worked for many different companies completing many different successful mergers and acquisitions. In December of 2001 Zimmer appointed a new senior vice president as well as corporate affairs and general counsel, David Dvorak who has worked with law firms specializing in mergers and acquisitions.

By 2002 Zimmer was on the map placing second on the market for prosthetic knees and third in the market for prosthetic hips. After strategically auditing the company, Zimmer Holdings had an eye on acquiring a company that would help their growth in the international market. Acquiring Centerpulse would put them at the top of their industry in the United States as well as Japan and Europe. Centerpulse was gaining publicity which made it a target for Zimmer holdings. Although this would be a good move for Zimmer as far as gaining market share, there were still questions that needed to be answered. In October of 2002 Zimmer had written up an offer and sent it over to Centerpulse which was declined. Because there were many things going on with the company, Zimmer did not pursue it too aggressively.

In 2003, a company called Smith and Nephew had been confidentially invited to bid on Centerpulse who accepted their offer. The acquisition would put the combined company at the number three position in the global orthopedic industry which was a big step because the companies had recently held the number seven and eight spots. Zimmer was slightly offended by the offer Smith and Nephew had made as they had been keeping a eye on Centerpulse after their initial offer and never received an invitation to bid on the company. So the question remained, would it be beneficial for Zimmer to try to outbid Smith and Nephew and gain the market share Centerpulse would give them, or would the acquisition do more harm to the company?

In my opinion, I feel that it would be the most beneficial for Zimmer to make an offer to Centerpulse and try to purchase the company. Having acquired Centerpulse, Zimmer would be in the running for the global leader in the orthopedics industry. They have the experienced personnel working for them who have successfully acquired many other companies. I think if Zimmer did not try to purchase Centerpulse, they are giving in to Smith and Nephew who will soon become a huge competitor.