American investors are seeing yet another big acquisition. Zimmer Holdings promises that its $13.4 billion deal for its rival, Biomet, will yield savings.
But these cuts aren’t sufficiently valuable to justify the 15 percent, or $2.3 billion, pop in Zimmer’s market value on news of the deal, before the stock slipped slightly. This time, enthusiastic share buyers are betting on growth.
Biomet made about $1 billion in Ebitda â€" or earnings before interest, taxes, depreciation and amortization â€" as adjusted by the company, in the year that ended May 2013, according to an initial public offering prospectus filed in March. The adjusted definition leaves out some fairly normal business expenses, such as stock-based compensation and litigation costs. But taken at face value and put on the same multiple as peers, it suggests the Biomet enterprise may be worth about $11.5 billion.
Zimmer thinks the deal should yield about $270 million of annual savings. Taxed and capitalized on a multiple of 10, these are worth almost $2 billion in present value terms. On paper, that covers the extra value Zimmer is paying over to Biomet’s private equity owners, Blackstone, Kohlberg Kravis Roberts, TPG and Goldman Sachs. But it doesn’t explain why the acquirer’s value rose sharply.
Over the past six years, buyers in M.&A. deals have met a mixed reception, with their stock going up only about half the time, according to Thomson Reuters data. Lately, though, the market has been kinder.
This year, there have been 34 American deals worth more than $1 billion. The acquirer’s stock has gone up in three-quarters of these situations. Fairly sensible deal-making is one reason, hefty cost savings are another. This time, though, investors and Zimmer’s managers are more excited about growth.
As Zimmer said during its conference call, hospitals are consolidating and using fewer vendors to save money. Buying a big competitor will give Zimmer more sway in negotiations as well as broadening its product range. The company thinks as a result of this merger it will expand at the same pace as the market over the next few years and then faster once it fully incorporates Biomet.
Growth from mergers is not, however, as bankable a promise as cost savings. The warm reception for Zimmer’s deal suggests a sense of optimism among investors. That, in turn, probably means more deals are coming.
Robert Cyran is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
