Less than two weeks before shareholders of Biomet Inc. (Warsaw, IN) were set to vote on a $10.9 billion buyout bid from a consortium of private equity firms, Institutional Shareholder Services (ISS; Rockville, MD), a provider of corporate governance and proxy voting services, recommended that shareholders reject the offer. The development was yet another hurdle in Biomet's long road to closing the deal, which was first announced last December.
In recommending rejection of the deal, which was based on a share price of $44, ISS said the offer's premium did not reflect the improvement in Biomet's market position since the proposed acquisition was first announced. The ISS report cited recovery in the hip and knee joint replacement sector--a core component of Biomet's business--as contributing to the company's improved market position.
The reaction of medtech analysts to ISS's recommendation was somewhat mixed. Many agreed that Biomet shares could fetch a higher buyout price than they attracted last December. But few analysts agreed that such a price would be as high as the $65 per share that ISS and a number of financial blogs suggested.
Two days before the scheduled vote on June 8, Biomet announced the private equity consortium had increased its offer to $46 a share, translating to a revised bid of $11.4 billion--a 4.5% increase over the original proposal. The private equity group of investors, which includes the Blackstone Group (New York City), Goldman Sachs Capital Partners (New York City), Kohlberg Kravis Roberts & Co. (New York City), and TPG (Fort Worth, TX), said that the revised offer was the absolute highest it would go to acquire Biomet.
Michael Matson, senior medtech analyst with Wachovia Capital Markets LLC (New York City), said $44-$46 per share is a fair price range for taking Biomet private. "While this increase raises the offer from the bottom to the top of the range, we believe that valuation remains reasonable for shareholders," he said.
In a prepared statement, the private equity group said, "Our offer empowers current shareholders who have an economic interest in Biomet common shares to realize significant value in a timely manner and represents the absolute limit of our ability to structure an appropriate buyout of Biomet. We are pleased that the consortium will be in a position to provide the company with financial and operational resources to support its future growth."
Financial services firm Morgan Stanley (New York City) described the revised offer as "fair from a financial point of view to holders of Biomet common stock." The firm has been acting as an adviser to Biomet since April 2006, when the company first acknowledged that it was pursuing alternative strategies going forward.
Biomet chairman Niles L. Noblitt said the board had unanimously accepted the revised bid and recommended that shareholders endorse the deal. "We believe the proposed price for the transaction is fair to Biomet's shareholders," he said. "We also believe that the investor group's tender offer will deliver superior value to Biomet's shareholders in a more efficient and more immediate fashion than the process provided by the original merger agreement. Moreover, this revised offer provides greater certainty and visibility to completion of the transaction."
Biomet noted that the revised offer represented a 32.3% premium over its stock price as of April 3, 2006, when speculation about a pending sale of the company became known. Yet the new offer represents only a 4% premium over the stock's market close on the day before the private equity consortium upped its offer.
ISS had no official comment on the financials of the sweetened offer, but it did suggest that the revised structure of the deal could streamline and facilitate shareholder acceptance. The revised bid is a tender offer, as opposed to the original, which was a statutory merger deal. In either case, the law in Indiana--home of Biomet's headquarters--requires 75% of shareholders to vote in favor of the transaction for the deal to be approved.
By all accounts, the involvement of ISS in the Biomet buyout deal was not initiated by a shareholder group or other external entity. Founded in 1985 and spun off from JP Morgan (New York City) in 1998, ISS was acquired this past January by RiskMetrics Group (New York City).
Questioning buyout bids.
ISS and similar firms are increasingly recognized as potentially influential players in the deal-making process. Their influence, however, is not without controversy. Critics contend that such firms, by recommending that shareholders reject a current offer and hold out for a higher price, could cause a suitor to back out of a deal, resulting in a significant loss of stock value.
Reflecting on ISS's involvement in the Biomet case, Emmett Stanton, a partner at law firm Fenwick & West LLP (Mountain View, CA), says, "It's not at all unusual that most transactions end up being adjusted to seal the deal. But the very success of private equity firms in often reaping huge profits a short time after the deal is done is a prime reason why shareholders will increasingly challenge these buyout arrangements. Shareholders can end up asking why the company's management cannot get as good a deal as a bunch of outsiders."
According to the revised terms of the Biomet deal, the tender offer was expected to commence on or before June 14, 2007, and expire on the 20th business day thereafter.
© 2007 Canon Communications LLCReturn to MX: Issues Update.