Medtronic buys Covidien to become world’s biggest medical device firm

US medical device maker Medtronic has agreed to buy Dublin-based Covidien for $42.9 billion (£25.3bn).

The company plans move its executive headquarters to Ireland which will allow it to take advantage of tax inversion at a time when the US business tax rate is as much as 35%. It is currently 12.5% in Ireland.

Once the purchase is approved by regulators, Medtronic will be the largest medical device and supply company in the world, employing more than 87,000 in 150 countries. The two businesses will be combined under the Medtronic plc banner and the merger is expected to result in annual cost savings of at least $850 million (£499.9 million) by the end of the company’s financial year in 2015.

In a statement Medtronic said: “It will have its principal executive offices in Ireland where Covidien’s current headquarters reside and where both companies have a long-standing presence.”

The company plans to have its operational HQ in Minneapolis where Medtronic currently employs 8,000 staff.

According to Medtronic the move 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.

Medtronic is one of Minnesota’s top 10 largest companies by revenue. In a statement to Fox News, governor Mark Dayton said he has been assured that no jobs will be lost as a result of the acquisition.

"We were assured that the company intends to keep its operational headquarters here in Minnesota and that no jobs will be lost here due to this transaction," the governor's statement read. "Company officials also told us that Medtronic intends to create over 1,000 new medical technology-related jobs in Minnesota during the next 5 years."

Earlier this month Bloomberg reported that Medtronic was looking at a takeover of London-based Smith & Nephew, in a bid to reduce its taxes by moving its base overseas.

At the same time, it was also reported that Stryker Corp had been making a bid for Smith & Nephew, although Stryker denied the report.

Mick Cooper, analyst at Edison Investment Research, said: “The benefits of tax inversion appear to be a key driver of the apparent interest in Smith & Nephew by Medtronic and Stryker, as it was for Pfizer with AstraZeneca.

“There would also be a solid strategic rationale for a deal with either company, but given Smith & Nephew’s impressive development under Oliver Bohuon, a material premium would need to be offered by any potential bidder.”