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Tax Savings Not Only Benefit to Medtronic-Covidien Deal

Wed, 06/18/2014 - 3:53pm
Kalorama

U.S.-based Medtronic said it would purchase Ireland-based Covidien for $42.9 billion, combining two of the world’s biggest medical device makers and helping Medtronic savings with a headquarters change. Kalorama estimates the deal will come just short of creating the largest device company based on 2013 revenues in its Global Market for Medical Devices, 5th Edition report, released last year. According to Kalorama, 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 emphasizing 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. Medtronic will pay $35.19 in cash and 0.956 of a share for each Covidien share.

Kalorama’s complete report on Global Market for Medical Devices, 5th Edition has a complete breakdown of 2013 and early 2014 device acquisitions.

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