Medtronic to buy Covidien for $42.9 billion and move headquarters to Ireland

Monday 16 June 2014 18.19
Medtronic to move its executive headquarters to Ireland
Medtronic to move its executive headquarters to Ireland

US medical device maker Medtronic has agreed to buy Dublin-based Covidien for $42.9 billion.

The company also said it would move its executive headquarters to Ireland in the latest move by US firms to harvest lower corporate tax rates abroad. 

While the cash and stock deal will allow Medtronic to reduce its overall global tax burden, the company said it was driven by a complementary strategy with Covidien on medical technology, rather than tax considerations. 

"The real purpose of this, in the end, is strategic, both in the intermediate term and the long term," Medtronic's chief executive Omar Ishrak said after the deal was announced. 

"It is good for the US in that we will make more investment in US technologies, which previously we could not," he added.

Medtronic's corporate tax rate, now at around 18%, will not change much, Ishrak said.

Medtronic is the world's largest stand-alone medical device maker with a market value of over $60 billion, while Covidien makes devices used in a range of surgical procedures. 

The merger will create a close competitor in size to the medical device business of industry leader Johnson & Johnson Co.

It broadens Medtronic's scope beyond its array of heart devices, spinal implants, insulin pumps and other products into areas such as weight-loss surgery and laparoscopic procedures. 

The expansion should allow it to better compete for business from hospitals, particularly in the US where healthcare reform efforts and shrinking government reimbursement for medical procedures has kept pressure on device pricing.

The disparate businesses means there should not be significant competition concerns, industry analysts said.

Analysts estimate the deal would shave two to three percentage points off Medtronic's corporate tax rate, pointing to Covidien's rate of 16%.

The deal values each Covidien share at $93.22, paid for by $35.19 in cash and 0.956 Medtronic shares. The transaction represents a 29% premium to Covidien's closing stock price on Friday, Medtronic said. 

The combination, which will leave Covidien shareholders owning about 30% of the combined company, is expected to result in at least $850m of annual pre-tax cost synergies by the end of fiscal year 2018. 

Medtronic said it would keep its operational headquarters in Minneapolis and pledged $10 billion in US technology investments over the next 10 years. 

Acquisitions of companies aimed at lowering corporate tax rates, known as inversions, have historically been rare but are becoming more common.

Some US lawmakers are concerned that the deals erode government revenue by giving corporations another tax-avoiding loophole. Two bills in the US Congress and a White House proposal would make inversions harder to do, but neither has gained much traction. 

But that could change if another major US company or two tried to conduct inversions, tax lawyers and analysts said last week.

Two recently attempted inversions failed, but only after they refocused political attention on the strategy. US-based Pfizer bid for rival British drugmaker AstraZeneca was rejected, while the proposed combination of US advertising firm Omnicom Group with France's Publicis Groupe collapsed for non-tax-related reasons. 

Medtronic's deal with Covidien is expected to close in the fourth quarter of 2014 or early 2015, Medtronic said.