Medical device maker Medtronic in $40bn bid to buy Covidien

Medtronic , the world’s number two medical device maker, is negotiating to buy Dublin-based Covidien for more than $40 billion, a person familiar with the talks said, in what may become the latest deal involving US firms driven by potential tax savings from relocating overseas.

The transaction may be structured as a tax inversion, allowing Medtronic to move its legal residence to Ireland, the person said. Medtronic is holding more than $14 billion in cash, most of it outside the US since it doesn’t pay taxes until it brings profits back into the country.

The Minneapolis-based firm, second only to Johnson and Johnson in medical-device sales, is often cited as a potential acquirer of healthcare rivals based in low-tax countries like Ireland and the UK.

Lisa Clemence, a Covidien spokeswoman, and Cindy Resman, a spokeswoman for Medtronic, declined to comment on the deal, which was reported over the weekend by the Wall Street Journal.

Covidien has a market value of $32.5 billion, based on its closing stock price. The acquisition, which could be announced as soon as today, could help Medtronic reduce its corporate tax rate and give it lower-cost access to money held outside of the country.

Move from Bermuda

Covidien was incorporated in Ireland in 2009, when it moved its principal executive office from Bermuda to Ireland. It employs 45,000 people globally, with sales of over $10 billion. It employs 1,500 in Ireland in Galway, Tullamore, Dublin and Athlone.

Turnover at the Irish operations is €292.4 million, according to Top1000.ie

Medtronic has operations in Galway, which is a “centre of excellence” for the development and manufacture of a number of the company’s key medical technologies for the treatment and management of cardiovascular and cardiac rhythm disease.

The Irish plant employs about 1,800 people and has sales of €1.2 billion. Globally the group has sales of about $17 billion.

The US has the world’s highest corporate tax rate, at 35 percent. It also taxes profits made elsewhere, after taking account of foreign levies, once the money is brought back into the country. Medtronic could be interested in Covidien to help it take advantage of changes under way in the US healthcare system.

Services to hospitals

Medical device companies are banding together to provide a comprehensive set of products and services to hospitals, which are cutting costs as the US Affordable Care Act takes hold. Medtronic and the French drugmaker Sanofi announced over the weekend they will work together on ways to make it easier to treat diabetes, one of the fastest- growing medical conditions, as healthcare companies try to move into new areas.

Medtronic sells pacemakers and defibrillators to regulate the heart’s electrical activity, stents to prop open clogged arteries, as well as devices for diabetes and the spine. Covidien makes healthcare products including surgical staples, feeding pumps, ventilators and devices to treat plaque build-up.

Most of Medtronic’s billions in cash is held outside the US, an issue acknowledged by chief executive Omar Ishrak.

Corporate tax reform

He has advocated US corporate tax reform that would allow the company to bring the money back into the country without paying such a high tax on it. Ishrak has said the company wants to expand its offerings globally in heart, muscle, skeleton and diabetes products.

While he has traditionally said he would be very disciplined with acquisitions, and not enter into deals that would dilute earnings per share, he recently eased those rules. – (Bloomberg)