Medtronic Swallows Covidien, Moves to Ireland

Jun 17, 2014 | Medical Devices

Medtronic Swallows Covidien, Moves to Ireland

The week started with an earthquake in the medical device industry. Medtronic announced on Sunday that it would acquire Dublin-based competitor Covidien for $42.9 billion and move its executive office to Ireland.

The megamerger will give birth to a corporate group with a yearly turnover of approximately $27 billion. Last year, Medtronic made a profit of $ 3.07 billion, whereas Covidien earned $1.7 billion with sales of $10.24 billion.

Cardiovascular and orthopedic device manufacturer Medtronic hopes for large synergies, as Covidien’s main products are surgery equipment items and medical ventilators. The deal will enable the company to make more integrated offerings. “With Covidien, Medtronic will be able to provide a broader array of complementary therapies and solutions that can be packaged to drive more value and efficiency in healthcare systems,” the press release states.

Medtronic names the relatively strong position of Covidien in the emerging markets as another advantage of the takeover. The new group will have combined revenues of $3.7 billion in emerging markets and $13 billion overall outside the US.

However, Medtronic’s main motivation, as most commenters suspect, is to alleviate some of its tax burden. Whereas the U.S. has one of the world’s highest corporate tax rates at 35%, Ireland’s main corporate tax is only 12.5%. In 2012, Covidien, which only moved to Ireland from Bermuda in 2009, paid 14.7% taxes on their profits. The acquisition will enable Medtronic to relocate its headquarters to Ireland and enjoy lower taxation. Reuters quotes Jefferies analyst Raj Denhoy who estimates Medronic’s tax savings at 2 to 3%.

Medtronic has amassed an enormous amount of cash from profits made outside the U.S., for which they would have to pay taxes if they brought them back. Therefore, a large part of the transaction will probably be realized with the $14 billion cash supply of the company.

Politicians in the U.S. Congress are currently trying to hamper the so-called inversion deals after the pharma companies Actavis and Horizon Pharma bought Irish rivals to lower their taxes.

Medtronic claims that tax avoidance isn’t the main motivation for the deal, however. “The real purpose of this, in the end, is strategic, both in the intermediate term and the long term,” Medtronic Chief Executive Omar Ishrak is quoted by Reuters. He insists that the company’s tax rates won’t change that much.

Minneapolis will remain as the operational headquarters and the company promises to reinvest the tax savings in the U.S. “Medtronic has consistently been the leading innovator and investor in U.S. medtech, and this combination will allow us to accelerate those investments,” Ishrak said.

The deal with Covidien is expected to close in the fourth quarter of 2014 or early 2015.

By Thomas Klein, Managing Editor, EMDT