While the cash and stock deal will allow Medtronic to reduce its overall global tax burden, the Minneapolis-based company said on Sunday 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 chief executive Omar Ishrak said in an interview 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.
Medtronic's corporate tax rate, now at around 18%, won't change much, Ishrak said.
The merger of Medtronic, the world's largest stand-alone medical device maker with a market value of over $60 billion, and Covidien, a maker of devices used in a range of surgical procedures, will create a close competitor in size to the medical device business of industry leader Johnson & Johnson.
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 United States 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 antitrust concerns, industry analysts said. Beyond the financial rationale, the company expands dramatically, and it puts them in a whole bunch of areas they never were in before. It makes sense, said Jefferies analyst Raj Denhoy.
Denhoy estimated the deal would shave 2 to 3 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 $850 million 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.