Medtronic Pays $42.9B for Covidien: 5 Key Observations

Spinal Tech

Medtronic and Covidien announced that they have entered into a definitive agreement under which Medtronic has agreed to acquire Covidien in a cash-and-stock transaction valued at a total of approximately $42.9 billion.

Here are five things to know:

 

1. 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. The boards of directors of both companies have unanimously approved the transaction.

 

Medtronic and Covidien have combined revenues of $13 billion from outside the United States, of which $3.7 billion comes from emerging markets. This transaction makes Medtronic a massive player in the medical device space, which could compete with emerging healthcare entrants such as Apple and Google.

 

According to Managing Director and medical device/healthcare IT M&A Expert at Mesirow Fnancial's Investment Banking Group Paul Teitelbaum, "Medtronic will solidify it's leadership position in cardiology and expand into a number of complementary surgical, crticial care and diagnostic areas in and outside the hospital, such as minimally invasive surgery, patient monitoring and respiratory as well as wound care and medical supplies."

 

2. Medtronic has also agreed to commit to $10 billion in technology investments over the next 10 years in areas such as early stage venture capital investments, acquisitions and research and development in the United States. This is a direct result of the company's new financial structure.

 

"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 CEO of Covidien.

 

3. After the transaction is completed, Medtronic and Covidien will be combined under a new entity to be called Medtronic plc. It will have its principal executive offices in Ireland. The transaction is expected to close in the fourth calendar quarter of 2014 or early 2015.

 

The decision to acquire Covidien emphasizes Medtronic's tax inversion strategy: the ability to cut taxes by moving the company's headquarters to Covidien's Ireland headquarters.

 

4. Medtronic's total worldwide revenue for the third quarter of fiscal year 2014 was $4.1 billion, up slightly from its revenue during the same period last year, $4 billion. In the United States, Medtronic's total revenue amounted to $ 2.2 billion in the third quarter of FY 2014, whereas during the third quarter of FY 2013 yielded $2.1 billion.

 

The company's U.S. surgical technologies revenue saw a spike to $241 million in the third quarter, up from $215 million over the same period last year. "The transaction will create a $27 million revenue company that will be the number one player in 12 distinct medical device markets—from diabetes to spine—and will rival the other leader—Johnson & Johnson," said Mr. Teitelbaum. "Covidient will enable Medtronic to expand its position in emerging markets, a strategy of great importance to Medtronic CEO Omar Ishrak."

 

Covidien has also seen rapid growth, and in December 2013, it announced the acquisition of Given Imaging, a provider of gastroenterology medical devices, including its flagship PillCam, a swallowed capsule endoscope.

 

5. The Medtronic-Covidien merger is the latest of several recent healthcare mega-mergers. Smith & Nephew recently completed their acquisition of ArthroCare, in a deal valued at $1.5 billion. In April, Zimmer announced it was acquiring Biomet in a transaction valued at approximately $13.35 billion.

 

Recently, there have been rumors Medtronic is looking to buy orthopedic device company Smith & Nephew. Smith & Nephew generates around $4.4 billion in annual revenue and the company's market cap is $16 billion. The other potential bidder, Stryker, was lukewarm on a potential purchase after Medtronic revealed interest at the beginning of June. At the time, Medtronic's stock shot up 3.7 percent to $63.27.

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