(Adds Medtronic chief executive and analyst comments)
By Susan Kelly and Greg Roumeliotis
June 15 U.S. medical device maker Medtronic Inc
said it agreed to buy Dublin-based Covidien Plc
for $42.9 billion and shift its executive headquarters to
Ireland in the latest move by U.S. firms to harvest lower
corporate tax rates abroad.
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 U.S. in that we will make more
investment in U.S. technologies, which previously we could not."
Medtronic's corporate tax rate, now at around 18 percent,
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 Co
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
Denhoy estimated the deal would shave 2 to 3 percentage
points off Medtronic's corporate tax rate, pointing to
Covidien's rate of 16 percent.
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 percent premium to Covidien's closing stock
price on Friday, Medtronic said.
The combination, which will leave Covidien shareholders
owning about 30 percent 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 U.S. technology investments over the next 10 years.
Acquisitions of companies aimed at lowering corporate tax
rates, known as inversions, have historically been rare but are
becoming more common.
Some U.S. lawmakers are concerned that the deals erode
government revenue by giving corporations another tax-avoiding
loophole. Two bills in the U.S. Congress and a White House
proposal would make inversions harder to do, but neither has
gained much traction. That could change if another major U.S.
company or two tried to conduct inversions, tax lawyers and
analysts said last week.
Two recently attempted inversions failed, but only after
they refocused political attention on the strategy. U.S.-based
Pfizer Inc's bid for rival British drugmaker AstraZeneca
Plc was rejected, while the proposed combination of U.S.
advertising firm Omnicom Group Inc with France's
Publicis Groupe SA collapsed for non-tax-related
Democrats in Congress have called for new restrictions on
these deals, with bills offered by Senator Carl Levin and his
brother, Representative Sander Levin, both Michigan Democrats.
President Barack Obama has a proposal similar to the Levins'
bills. Republicans have expressed concern about inversions, but
have not put forward legislation of their own.
Some lawmakers have said that anti-inversion curbs should be
tackled as part of a comprehensive overhaul of the
loophole-riddled U.S. tax code, but this is a difficult project
that Congress has not tackled since 1986.
Medtronic's deal with Covidien is expected to close in the
fourth quarter of 2014 or early 2015, Medtronic said.
Perella Weinberg Partners LP, Cleary Gottlieb Steen &
Hamilton LLP and A & L Goodbody advised Medtronic, while Goldman
Sachs & Co and Wachtell, Lipton, Rosen & Katz and Arthur
Cox advised Covidien. Bank of America Merrill Lynch
provided committed financing for the transaction.
(Reporting by Susan Kelly in Chicago and Greg Roumeliotis in
New York; Additional reporting by Kevin Drawbaugh in Washington,
D.C.; Editing by Michele Gershberg, Dan Grebler, Eric Walsh and