Bausch & Lomb Marks Medtech’s Latest Move into the Private Sector

Diversified eye-care company Bausch & Lomb Inc. ( Rochester, NY) is set to go private. The transaction, which follows on the heels of the $10.9 billion acquisition of orthopedics manufacturer Biomet Inc. ( Warsaw, IN) by a consortium of private equity investors, has prompted discussion among industry observers as to whether the medtech industry can expect to see more publicly traded players going private.

Last May, Bausch & Lomb announced that it would be acquired by private equity firm Warburg Pincus LLC ( New York City). In a deal valued at $4.5 billion, the investment banking firm offered $65 per share, or $3.7 billion, in addition to taking on $830 million of Bausch & Lomb debt. The deal was unanimously endorsed by Bausch & Lomb's board following the recommendation of a special committee of independent directors.

"As a private company, Bausch & Lomb will have greater flexibility to focus on our long-term strategic direction to be a global leader in providing innovative and technologically advanced eye health products to eye care professionals and consumers," said Ronald L. Zarrella, chairman and CEO of Bausch & Lomb.

Elizabeth H. Weatherman, a managing director and head of the medical device group at Warburg Pincus, said, "This investment reflects a unique blend of our deep domain expertise in medical technology, pharmaceuticals, and healthcare, which has been a focus area for Warburg Pincus since 1973."

However, just days after the deal was announced, Bausch & Lomb received an unsolicited bid from Advanced Medical Optics (AMO; Santa Ana, CA), a rival in the eye-care business. The $4.2 billion proposal was based on $75 per share—$45 in cash plus $30 in AMO stock for each Bausch & Lomb share.

Although Bausch & Lomb acknowledged that the AMO offer could result in a superior proposal, company management appeared overtly cool, if not hostile, to the proposal. It was also opposed by one of its major shareholders, ValueAct Capital Partners LP ( San Francisco), which holds a nearly 15% stake in the company. In addition, some industry analysts questioned the certainty of the AMO offer and whether the company would be able to convince Bausch & Lomb shareholders of the merits of the deal, particularly since AMO had only limited permission and time to make its case.

In a letter to Bausch & Lomb shareholders, AMO CEO James Mazzo expressed disappointment that the "Bausch & Lomb board has concluded not to grant adequate time for us to provide you with the information you requested in a manner that would be meaningful." In a blistering letter to the Bausch & Lomb board, Mazzo described the Warburg Pincus offer as "inferior to AMO's proposal both in terms of value and the significant synergies" that a combined company would create. He then added, "If, in the future, you decide to run a process that is designed to deliver value to your shareholders, please let us know."

Early this month, AMO withdrew its offer, clearing the way for the closing of Warburg Pincus deal.

Thomas Gunderson, a managing director and senior medtech analyst with Piper Jaffray & Co. ( Minneapolis), says the idea of more medtech companies going private is intriguing. "There's an excess of private equity funds and a paucity of good opportunities," he says. "Medical technology is increasingly recognized as one of those sector opportunities."

Gunderson says there are a number of incentives for companies going private. "By going private, many medtech companies could realize significant cost savings while having a far greater ability to focus on long-term goals and objectives—rather than worrying about the next quarterly report," he says. Gunderson estimates that many companies could realize savings of 20–30% by going private.

However, Gunderson says, whatever level of enthusiasm toward privatization that existed among medtech companies just a short time ago has likely been tempered by the behavior of the credit markets in recent weeks. "Right now, we need to wait for the dust to settle," he says.

Charles T. Johnson, medical device group leader at Choate, Hall & Stewart LLP (Boston), says, "While there is a great deal of private equity dedicated to the medtech space, most of the deals represent investments in privately held companies. Although the savings in going from a public to a private company go straight to the bottom line, I don't foresee any significant increase in the number of publicly traded companies making that move. By and large, in this sector, private equity will seek out private firms."

Dow Jones VentureOne (San Francisco) recently reported that venture capital investment in medtech firms reached an all-time high in the second quarter of this year, with 75 deals valued at $1.05 billion, a 58% increase over the year-ago quarter.

"One of the primary economic drivers of public companies going private is the cost of compliance," says Ogen Gurel, MD, chairman of the Aesis Research Group LLC (Chicago), a life sciences consulting firm. "The regulatory demands of Sarbanes-Oxley are very powerful and can be a heavy burden. But looking ahead, there is reason to believe that these regulations may be modified for at least small-cap and micro-cap companies."

Gurel notes that regulatory trends tend to go in cycles. "More importantly, whatever boom there was for private equity in life sciences deals may now have peaked as a result of recent market turmoil—and its implications," he says. Looking ahead, Gurel sees more U.S. life science companies going public in overseas markets—particularly London. "It's a trend that bears watching," he says.

With the current uncertainty in credit markets, some observers believe that the boom in private equity deals for public companies may have peaked—or at least been put on hold until market volatility subsides. Another factor to consider, say analysts, is the increasing calls for reassessing tax policy for acquisitions orchestrated by private equity firms.

© 2007 Canon Communications LLC

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