(Rewrites with analyst, fund manager comment on potential
By Susan Kelly and Bill Berkrot
June 16 Medtronic Inc's $43 billion deal
for Dublin-based Covidien Plc should accelerate already
intense efforts by medical device rivals to seek merger
partners, industry analysts and bankers said on Monday.
Medtronic announced the transaction on Sunday, saying it
would re-base the combined company in Ireland, where it can take
advantage of lower corporate tax rates and easier access to cash
The purchase also gives Medtronic more products, as well as
greater leverage in negotiating with hospital clients that are
taking a much harder line on device spending.
The intensified competition will bring new pressure on large
device makers such as Abbott Laboratories, Stryker Corp
and St Jude Medical Inc to seek acquisitions,
industry watchers say. Medtronic plus Covidien will rival
industry leader Johnson & Johnson's $28.5 billion in
annual device revenue.
UK-based Smith & Nephew Plc, which has already
attracted takeover interest from companies seeking better tax
rates overseas, remains high on the list of targets, they said.
Device makers such as Boston Scientific Corp should
feel more pressure to get bigger or face being left out in the
The merger mania is a product of pressures on the healthcare
systems in the United States and in Europe, where hospitals are
getting paid less to deliver care. U.S. hospital systems are
consolidating and buying doctor practices to cope with the
"It becomes more necessary for the medical device companies
to have a broader product line in order to be able compete and
have economies of scale," said Len Yaffe, portfolio manager of
the San Francisco-based healthcare fund StockDoc Partners.
Medtronic said its own appetite for deals does not end with
absorbing Covidien. It expects to use some of the additional
cash flow from the deal on acquisitions and minority
investments, and internal research and development.
"There still are plenty of opportunities for us to focus on
other acquisitions, other innovation. That momentum doesn't need
to stop, even in this integration period," Medtronic Chief
Financial Officer Gary Ellis said in a conference call with
Medtronic has been especially eager to expand beyond selling
devices to providing advisory services to hospitals.
"To the degree we can bring in other acquisitions to support
that further, we will look closely at that," Chief Executive
Omar Ishrak said.
The latest consolidation wave in the medical device arena
began in April when Zimmer Holdings Inc reached a deal
to buy rival Biomet Inc for more than $13 billion, expanding its
orthopedic product offerings.
Rival orthopedics maker St Jude Medical "could be an
acquirer of a smaller company to emulate what Medtronic is
doing," Yaffe said.
Morningstar analyst Debbie Wang has Stryker atop her list of
"That company is a serial acquirer and CEO Kevin Lobo has
indicated that it is trying to move the company in the direction
of becoming a larger partner with its hospital customers, the
same strategy that Johnson & Johnson and Medtronic are taking to
heart," Wang said.
Wang sees Edwards Lifesciences Corp as a target whose
specialty in heart valves would fit in with a number of
companies interested in cardiac products.
Yaffe listed Hospira Inc, Becton Dickson and Co
, Baxter International Inc and Massimo Corp
as attractive takeover candidates that could help a
larger company become more of a one-stop shop for hospitals.
While several industry experts pointed to Boston Scientific
as an acquirer, it could still be wary in the wake of its $27
billion purchase of Guidant in 2006. The deal left it heavily in
debt and struggling with a depressed stock price for years.
Medtronic is acquiring Covidien in a so-called inversion
transaction that allows it to reincorporate in Ireland.
Analysts said the strategy will give Medtronic access to
cash generated through sales outside the United States and now
held overseas without paying a penalty for repatriating the
money. This benefit overshadows the modest reduction in the
overall corporate tax rate that the company is forecasting.
Medtronic also said Monday it would maintain its prior
forecast for fiscal 2015 earnings in the range of $4 to $4.10 a
share. Its shares were off 1.4 percent at $59.87, while those of
Covidien were up 20.7 percent at $86.93.
(Reporting by Susan Kelly in Chicago and Bill Berkrot in New
York; Additional reporting by Soyoung Kim in New York; Editing
by Michele Gershberg, Nick Zieminski and Steve Orlofsky)