Tomorrow Your Company’s Ours: Medtronic Swallows Covidien

It’s been a recurring theme in recent times that the medical device industry is seeing a significant amount of consolidation. It seems like every week we report tales of big companies buying smaller companies in order to get hold of their up-and-coming technology and associated intellectual property. Mostly then, M&A activity is big company buying little company.

Occasionally we get the big deal, like when Arthrocare went the way of Smith & Nephew. And in the last two weeks we’ve heard rumours that Mr Smith and his Nephew were enjoying approaches of their own from Stryker, Medtronic and Johnson & Johnson. Sometimes simple economics make these big deals look blindingly obvious. If product ranges fit without too much cannibalisation, culture, ethos and strategic direction all fit, why wouldn’t they just get together and enjoy all the benefits of global reach and economy of scale that flow from being in one big bed?  

It shouldn’t really be a surprise then to wake up on a Monday to find that Medtronic is coughing up the best part of an eye-watering $43 Billion to buy Covidien. And I guess it’s not, but for the fact that this is one big acquisition, dwarfing the $21 Billion paid by DePuy for Synthes.

While both Boards have signed off on the deal, it is subject to certain conditions, including approvals by Medtronic and Covidien shareholders, regulatory clearances in the U.S., the E.U., China and certain other countries.

The transaction is expected to close in the fourth calendar quarter of 2014 or early 2015.

Background

Whether you call it a merger or an acquisition is almost academic, but the fact is that Medtronic, Inc. and Covidien plc have entered into a definitive agreement under which Medtronic has agreed to a cash-and-stock transaction valued at $93.22 per Covidien share, or a total of approximately $42.9 billion. The deal will leave existing Covidien shareholders with a roughly 30% stake in the combined business to add to the cash they’ll make from the sale.

So the big question is why would Medtronic do this? And the answer on this occasion lies in all the beautiful things big companies benefit from. If you’re big already, why not get a bit bigger? If there is such a thing, this is a no brainer. It’s even likely to be accretive within two years and “significantly accretive” thereafter. 

Medtronic says the deal will confer upon it a significantly advanced position as the world’s premier medical technology and services company. The combined company will have a comprehensive product portfolio, a diversified growth profile and broad geographic reach, with 87,000 employees in more than 150 countries. 

Specifically the company says buying Covidien is entirely consistent with its three strategic underpinning of “Therapy Innovation, Globalization and Economic Value.” In other words, if there’s a big disease out there that demands a medtech solution, expect Medtronic to be there on a global scale…Covidien’s range, especially in surgical laparoscopy, certainly gets Medtronic to places it doesn’t reach at the moment.

The economic strategy is interesting too. You can almost hear the Bond villain cackling about world domination when you read between the lines. The company says it adopts “an intense focus on aligning with its customers to create more value in healthcare systems around the world” and that it combines “products, services and insights into solutions aimed at expanding access and reducing healthcare costs.”

What this means is that as long as there’s not too much overlap (there isn’t), it makes perfect sense to build on what is, crudely put, a one-stop-shop approach by bolting on Covidien’s range and tying customers into systematic approaches to healthcare delivery.

Not to mention the small matter of cost-saving by “optimizing global back-office, manufacturing and supply-chain infrastructure.”

All of this is expected to play out as at least $850 million of annual pre-tax cost synergies by the end of fiscal year 2018.

Oh and while we’re on the subject of money, one suspects there may be some tax benefits flowing from this deal….. the businesses of Medtronic and Covidien will be combined under a new entity to be called Medtronic plc., with principal executive offices in Ireland.

To head off any objections based on monopoly/anti-competitive/U.S. tax (or lack of) resistance, and exuding a warm glow of goodness, the press release says the combined company is offering a juicy sweetener by reasserting its commitment to the U.S. as a healthcare innovator, strategic business partner and employer of choice. In practice that means it’s setting aside $10 billion in technology investments over the next 10 years in areas such as early stage venture capital investments, acquisitions and R&D in the U.S., that it says is above and beyond Medtronic’s and Covidien’s existing plans

Company comments 

for Medtronic

“We are excited to reach this agreement with Covidien, which further advances our mission to alleviate pain, restore health and extend life for patients around the world,” said Omar Ishrak, Chairman and Chief Executive Officer of Medtronic. “This acquisition will allow Medtronic to reach more patients, in more ways and in more places. Our expertise and portfolio of services will allow us to serve our customers more efficiently and better address the demands of the current healthcare marketplace. We also look forward to welcoming the Covidien team to Medtronic and working together to improve healthcare outcomes globally.”

for Covidien 

“Covidien and Medtronic, when combined, will provide patients, physicians and hospitals with a compelling portfolio of offerings that will help improve care and surgical performance,” said José E. Almeida, Chairman, President and Chief Executive Officer of Covidien. “This transaction provides our shareholders with immediate value and the opportunity to participate in the significant upside potential of the combined organization. I’d like to thank our 38,000 employees whose hard work and dedication has enabled Covidien to deliver innovative health solutions that improve patient outcomes.”

Source: Medtronic, Inc., Business Wire

1 thought on “Tomorrow Your Company’s Ours: Medtronic Swallows Covidien”

  1. Companies in MedTech are usually unable to leverage their portfolio for a variety of reasons. The divisions (and regions) within large companies work independently and do not communicate much among themselves. The argument that scale matters is a nice theory by someone who has never worked in the sector. The larger the company gets, the more the complexity it creates. This sector has unique attributes not found in other industries

    Anti competitive laws prohibit bundling by large companies and will only get stronger. Even J&J the largest of all has not been able to leverage scale and it’s diverse portfolio. Boston Scientific tried to get larger and failed.

    Most of Covidien portfolio is disposables and the biggest threat is from reuse by hospitals.

    The future belongs to lean and innovative companies. This deal will not pan out as intended. A new CEO will takeover after a few years who will try to divest low margin businesses.

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