4.	Business Combinations

Biomet Merger

On the Closing Date, we completed our merger with LVB, the parent company of Biomet. We paid $12,030.3 million in cash and stock and assumed Biomet’s senior notes. The fair value of the principal amount of the senior notes was $2,740.0 million, which we repaid in full prior to June 30, 2015.

The merger enhances our position in the nearly $50.0 billion musculoskeletal industry. Our product portfolio now includes Biomet’s legacy product lines, including knee and hip reconstructive products; sports medicine, extremities and trauma products; spine, bone healing, craniomaxillofacial and thoracic products; dental reconstructive products; and cement, biologics and other products. Our larger scale provides for increased competitiveness in our core and emerging franchises and a stronger presence in our geographic markets. The merger positions us to increase cross-selling opportunities between our legacy product portfolios and sales force specialization. The combination of our R&D functions will allow us to allocate a greater portion of the combined R&D spending towards innovations designed to address unmet clinical needs and create new-market adjacencies. We also expect to realize operational synergies to enhance value for stockholders.

In order to consummate the merger under applicable antitrust laws and regulations in certain countries, we had to divest certain product line rights and assets. As a result, we recognized a net gain of $19.0 million in non-operating other expense, net in the year ended December 31, 2015.

We funded the cash portion of the merger consideration with available cash on hand, as well as proceeds from a $3.0 billion senior unsecured term loan and $7.65 billion in senior unsecured notes issued in March 2015. See Note 12 for further information regarding these debt instruments.

The aggregate merger consideration paid was $12,030.3 million, consisting of $8,307.6 million of cash and 32.7 million shares of our common stock valued at $3,722.7 million. The value of our common stock was based upon a stock price of $113.83 per share using the average of the high and low trading prices on the Closing Date. As discussed in Note 3, $90.4 million of the cash and common stock consideration was allocated to compensation expense due to the acceleration of the vesting of unvested LVB stock options and LVB stock-based awards in connection with the merger. Therefore, the amount of merger consideration utilized for the acquisition method of accounting was $11,939.9 million.

The merger was accounted for under the acquisition method of accounting. Accordingly, LVB’s results of operations have been included in our consolidated results of operations starting on the Closing Date, and LVB’s assets and liabilities were recorded at their estimated fair values in our consolidated statement of financial position as of the Closing Date, with the excess of the purchase price over the estimated fair values being allocated to goodwill. During the year ended December 31, 2015, Biomet contributed net sales of $1,602.0 million. During the year ended December 31, 2015, Biomet contributed net operating losses of $295.8 million to our consolidated results, driven by $90.4 million of merger compensation expense for unvested LVB stock options and LVB stock-based awards, $73.0 million of retention plan expense, severance expense, inventory step-up expense and intangible asset amortization.

The purchase price allocation as of December 31, 2015 is preliminary. The primary tasks to be completed related to our purchase price accounting are refinements to intangible assets for certain less significant products, finalizing tax accounts, including, but not limited to, the allocation of acquired intangible assets and goodwill on a jurisdictional basis, and finalizing the estimated fair values of contingent assets and liabilities. There may be differences between these preliminary estimates of fair value and the final acquisition accounting, which differences could be material. The final estimates of fair value are expected to be completed as soon as possible, but no later than one year from the Closing Date.

The following table summarizes our estimate of the preliminary fair values of the assets acquired and liabilities assumed at the Closing Date, including measurement period adjustments recognized from our initial purchase price allocation through December 31, 2015 (in millions):


	Closing Date (initial)		Adjustments			Closing Date (as adjusted)
Cash	$	494.8	$	–		$	494.8
Accounts receivable, net		544.7		(15.7	)		529.0
Inventory		1,161.7		84.0			1,245.7
Other current assets		123.4		(97.0	)		26.4
Property, plant and equipment		699.4		92.0			791.4
Intangible assets not subject to amortization:
Trademarks and trade names		515.0		(36.0	)		479.0
In-process research and development (IPR&D)		–		246.0			246.0
Intangible assets subject to amortization:
Technology		3,075.3		(583.2	)		2,492.1
Customer relationships		5,829.0		(873.0	)		4,956.0
Trademarks and trade names		–		389.0			389.0
Other assets		29.5		211.6			241.1
Goodwill		5,270.2		2,303.7			7,573.9

Total assets acquired		17,743.0		1,721.4			19,464.4

Current liabilities		588.9		39.2			628.1
Long-term debt		2,740.0		–			2,740.0
Deferred taxes		2,489.7		1,607.8			4,097.5
Other long-term liabilities		58.2		0.7			58.9

Total liabilities assumed		5,876.8		1,647.7			7,524.5

Net assets acquired	$	11,866.2	$	73.7		$	11,939.9

Adjustments to the initial preliminary fair values of the assets acquired and liabilities assumed related to a change in estimate to the fair value of merger compensation expense for unvested LVB stock options and LVB stock-based awards, refinement of the estimated fair values of inventory, property, plant and equipment and intangible assets, refinement of income and deferred tax balances and adjustments to contingent liabilities and contingent gains based upon additional evidence obtained, among other adjustments. There may be additional adjustments to these preliminary estimates of fair value which could be material.

The weighted-average amortization period selected for trademarks and trade names, technology and customer relationship intangible assets was 15 years, 15 years and 18 years, respectively.

IPR&D intangible assets represent acquired R&D projects which have not received regulatory approval. IPR&D intangible assets are capitalized and accounted for as indefinite lived intangible assets and will be subject to periodic impairment testing until the successful completion or abandonment of the associated R&D project. Upon successful completion of each R&D project, the associated indefinite lived intangible asset is then accounted for as a finite lived intangible asset and amortized on a straight-line basis over its estimated useful life. If an R&D project is abandoned, the associated indefinite lived asset is charged to expense.

The IPR&D intangible assets recognized in the Biomet merger relates to a variety of R&D projects. The fair values of the IPR&D intangible assets were determined using the income approach. Most of these projects are expected to be completed within a year or two after the Closing Date. Remaining costs to complete these projects are expected to be an insignificant amount of our total annual R&D spending.

The goodwill is generated from the operational synergies we expect to achieve from our combined operations. None of the goodwill is expected to be deductible for tax purposes.

The following sets forth unaudited pro forma financial information derived from (i) the audited financial statements of Zimmer for the years ended December 31, 2015 and 2014; and (ii) the unaudited financial statements of LVB for the period January 1, 2015 to June 23, 2015 and for the year ended December 31, 2014. The pro forma financial information has been adjusted to give effect to the merger as if it had occurred on January 1, 2014.

Pro Forma Financial Information

(Unaudited)


Year Ended December 31,	2015		2014
	(in millions)
Net Sales	$	7,517.7	$	7,965.2
Net Earnings	$	327.4	$	314.5

These unaudited pro forma results have been prepared for comparative purposes only and include adjustments such as inventory step-up, amortization of acquired intangible assets and interest expense on debt incurred to finance the merger. Material, nonrecurring pro forma adjustments directly attributable to the Biomet merger include:

•

The $90.4 million of merger compensation expense for unvested LVB stock options and LVB stock-based awards was removed from net earnings for the year ended December 31, 2015 and recognized as an expense in the year ended December 31, 2014.

•

The $73.0 million of retention plan expense was removed from net earnings for the year ended December 31, 2015 and recognized as an expense in the year ended December 31, 2014.

•

Transaction costs of $17.7 million was removed from net earnings for the year ended December 31, 2015 and recognized as an expense in the year ended December 31, 2014.

Other Acquisitions

We made a number of business acquisitions during the years 2014 and 2013. In October 2014, we acquired ETEX Holdings, Inc. (“Etex”). The Etex acquisition enhanced our biologics portfolio through the addition of Etex’s bone void filler products. In May 2013, we acquired the business assets of Knee Creations, LLC (“Knee Creations”). The Knee Creations acquisition enhanced our product portfolio of joint preservation solutions. In June 2013, we acquired NORMED Medizin-Technik GmbH (“Normed”). The Normed acquisition strengthened our Extremities and Trauma product portfolios and brought new product development capabilities in the foot and ankle and hand and wrist markets.

The results of operations of these acquired companies have been included in our consolidated results of operations subsequent to the transaction dates, and the respective assets and liabilities of the acquired companies have been recorded at their estimated fair values in our consolidated statement of financial position as of the transaction dates, with any excess purchase price being recorded as goodwill. Pro forma financial information and other information required by GAAP have not been included for these acquisitions as they, individually and in the aggregate, did not have a material impact upon our financial position or results of operations.