If we're right, this is an asymmetric upside. Rarely do you get a chance to change a market and that first mover advantage is gonna be significant. We will be right for a decade if we're right.
Sometimes, the biggest decisions just don't happen at the right time. They happen before you've built a track record, before you're known, before you're trusted and you don't have any data because you're the first. And yet, every now and then a leader has to decide anyway to act. Not because they're comfortable with what might happen if they're wrong, but because they're so confident about what could happen if they're right.
I'm Jimmy Allen and this is Founder's Mentality: The CEO Sessions.
Kevin Lobo is chair and CEO of Stryker, one of the leading medical technology companies. He was born in Mumbai, raised in Montreal, and he's from a family where getting a college degree wasn't the norm. He spent his career moving through industries he didn't grow up in, asking questions other people weren't asking and taking decisions other people weren't ready for. Kevin joined Stryker in 2011 and became CEO within a year. And almost immediately he did something that surprised his board, upset some of his customers, went against the advice of industry experts and sent the stock down 4% in a day. He was right, but it wasn't clear right away, which makes for a pretty uncomfortable ride.
People felt that robotics wasn't needed in orthopedic surgery. Surgeons would be trained on a certain implant and they would use that implant for their entire career. Prior to being CEO, I saw that Mako had made progress with robotic assistance for partial knee as well as hip replacement. Then I became CEO and I decided that this is a deal I wanted to pursue. It was highly risky because it was a publicly traded company, about a hundred million dollars of revenue, loss making, partial knee is only 4% of the knee procedures. It was a small portion of the market, but they were making great progress and I felt that the total knee application, which was going to come in the years ahead was gonna be the killer application. The cost for this acquisition was 1.6 billion, which seemed gigantic at the time given it was a hundred million dollars company losing money. But I really felt it was going to be a game changer. But I would tell you it was extremely unpopular.
Kevin, take us back to you recommending that decision. I imagine you fairly new CEO walking into your board with customers opposed with your advisory council, opposed, bring us into that room.
So when we walked into the board, the pitch to boil it down simply we have a chance to transform the orthopedic industry and to differentiate our company from all the other orthopedic companies. Historically, market share never moved in orthopedics. Whatever they were trained with is what they ended up retiring with. We will be able to move massive market share. We will improve the satisfaction of total knee replacement through the use of robotic assisted surgery. We will be less invasive to the patient. We will be more precise, more accurate, more consistent, and Stryker will become the number one company in hips and knees.
What was that like for you? And now that you've probably looked back, what the hell was that like for your board?
The board ultimately supported the deal, but it was difficult. They pushed back and frankly it was understandable that they would push back. The first area of pushback was why should we do this deal now? It's a publicly traded company, they're not for sale and you're a brand new CEO, why do you want to take such a big risk at this time? And there were two major reasons why I wanted to move at that time, this total knee application was going to happen a year before we did the deal. The stock was at $44. It had dropped all the way down to $16. And I felt that once they announced they had a total knee application, the stock was gonna jump. The second reason was one of our major competitors was going through a very tricky, difficult integration of a different acquisition and I knew that they would have interest in this technology and they had deep pockets so they could afford to spend 1.6 billion. If we moved quickly, we would be able to take the asset out. And then of course the second question was, 'Well, what happens if you're wrong?' You believe this is gonna be a value creating deal? What happens if we're wrong? And so what I said at the time was that if we're wrong, it's not gonna kill the company. We have such a strong balance sheet, we could afford to make a $1.6 billion bet. At the time we were a roughly $7 billion sales company. We're now 25 billion. But back then it was a sizable deal for our company. We had not done very many acquisitions, certainly not of that size, but I felt that wouldn't kill the company. And if we were wrong, it would be a niche like navigated surgery and we'd write off about a billion dollars of goodwill. And so I said that and a couple of directors reacted a little bit anxiously with, 'We've never had a write off of any size, let alone a billion dollar write off.' But I said, 'That's if we're wrong, if we're right, this has an asymmetric upside, we will be right for a decade if we're right and that first mover advantage is gonna be significant.' So I leaned in hard and I felt that it was the right decision for the company. On a personal level, I knew that I was betting my job on this. Many CEOs have gotten fired because they've missed on acquisitions, but usually they're larger transformational deals. In this case, I really wasn't betting the company when I was pitching this. Some of the board members were totally with me. Some of the board members were totally shocked and surprised and some were doubtful. But eventually they backed me. They could feel my conviction. They knew I was willing to bet my job on this, that it really was a risk worth taking.
Most leadership stories end right there. The pitch, the room, the moment the board was convinced by the CEO to go from no to yes. But Kevin would tell you that was the easy part because then he had to live with the decision to buy. Kevin was changing an industry. This acquisition was a smart one only if he changed the market, changed the behavior of surgeons, changed the way his customers bought and his salesforce sold. But behavioral change takes time. And Kevin knew this. He could measure the market moving and the behaviors changing by how many robots he sold. So he told analysts and he told the board to focus on that single metric.
Kevin, you answered one of my questions, which is while the company could survive, you were fairly certain that you might not survive if you were wrong. During those two years, was there any point during that 2013 to 16 that you thought, oh my goodness, maybe this was the wrong bet?
No, I really didn't know until we launched the Total Knee Application. And as we developed and had surgeons involved, some of them started to feel, 'Okay, this does make sense.' So I think I got enough positive signs over the three years. Believe me, they weren't all sunny days. The first quarter after we did the deal, we only sold one robot. I told Wall Street 'cause I told them I'd communicate how many robots. So I said, 'We've had challenges with integration and we only sold one robot in the quarter.' It was a bit embarrassing to say the least. Even at the time we did the deal, They said, 'When are we gonna know if it's a good deal?' The investors? I said, 'You have to wait till we launch the Total Knee and give us 18 months after and you'll see market share move in a very significant way, hundreds of basis points of market share.' To which they said that's never been done in orthopedics before. And I said, 'Well actually Mako with Partial Knee didn't move market share very significantly over four years and they're not even an orthopedic company.' And so I had conviction throughout, well there were some rocky days during that couple years. I just was patient and investors actually surprisingly stayed with us.
Often the way these things are described after the fact is, you know, you made a tough decision. You were right and then went on. But what people don't talk a lot about is the time lag. You made a tough decision and then that decision looked pretty tough for two years during that time were you still able to make other tough decisions while kind of waiting for that first big one to be right.
