Medtronic has said it would purchase Ireland-based Covidien for $42.9 billion. The move would combine two of the world's biggest medical device makers.] and give Medtronic tax benefits as well as access to Covidien’s US and European distribution network.
According to Kalorama Information in its Global Market for Medical Devices, 5th Edition report, the deal is estimated to come just short of creating the largest device company based on 2013 revenues. Kalorama says that Johnson and Johnson is the largest device company at $28.5 in 2013, but if the new combined company has a strong year of sales, rankings could change.
The deal, which is being structured as a so-called inversion, will relocate Medtronic from its legal headquarters in Minneapolis to Covidien's corporate home in Ireland, where the tax rate is significantly lower than in the United States. Medtronic plans to keep significant operations in the United States but Kalorama says the tax implications are only one aspect. A greater aspect is access to Covidien's rich distribution channels in US and European hospitals.
"They are probably complementary in terms of distribution venues, and can stay out of each other's revenue lines well," said Bruce Carlson, publisher of Kalorama Information "Covidien staples your wound, keeps track of you in the hospital while Medtronic makes your heart pump, provides a new spine, or provides your body with timed insulin. Medtronic management is not emphasising tax savings in the press statements."
According to Kalorama's report, consolidation was a trend in the device industry. In 2013 and early 2014, key market players were active in acquiring companies, among these were Boston Scientific, Stryker Corporation, CareFusion, ThermoFisher Scientfic, The Carlyle Group, and Medtronic. Stryker's purchase of MAKO Surgical, Zimmer's purchase of Biomet and the sale of J&J's Ortho Clinical Diagnostic Group to the Carlyle Group were among the larger purchases.
"The media reports are focusing on the inversion deal, but with a slow-growing device market, consolidation has been an industry trend," Carlson said. "This wouldn't be announced if there weren't real benefits to the business as well as the tax moves."
Kalorama said that together, the two companies will become one of the largest medical device makers, with 87,000 employees in over 150 countries.
According to a report by Reuters, Medtronic has reported the strongest quarterly US sales growth for its medical devices in five years and said it was committed to completing the acquisition of Irish-domiciled Covidien by the end of the year or early 2015.
Medtronic’s net earnings fell to $871 million in the first quarter up to July 25 from $953 million the year before.