Deals of the Year 2014: Medtronic, Covidien Home in on Tie-Up

With their pending $46.8 billion merger, the two medical device makers find themselves swept up in the corporate tax inversion debate.


Ariana Lindquist

Last June, Medtronic chairman and CEO Omar Ishrak and José Almeida, chairman, president and CEO of Covidien, announced the combination of their medical device companies in a takeover that would see Medtronic pay $46.8 billion in cash and stock. But it wasn’t just the price tag of the deal that raised eyebrows: Minneapolis-based Medtronic, which reported $4.4 billion in net sales in its latest quarter, made the controversial decision to locate the new company’s principal executive offices in Dublin, where much smaller Covidien, which in the quarter ended September 26 posted sales of $2.73 billion, is based. The move will allow the company to avoid U.S. taxes on overseas profits, and it came at a time when tax inversions appeared to be on the uptick.

The decision thrust Ishrak, 58, and Almeida, 52, into a growing U.S. debate over the impact of inversions on the economy. That fight, which spawned new regulations to make inversions tougher, began in April with the announcement that New York–based Pfizer was interested in buying London-based AstraZeneca and move the new company’s headquarters to the U.K. (AstraZeneca would reject the offer.) Medtronic’s purchase of Covidien made headlines soon after, followed by Burger King Worldwide’s announcement of plans to buy Canadian doughnut chain Tim Hortons and set up headquarters in Toronto. What had been painted by those involved in the deal Medtronic-Covidien as a significant but secondary feature of the tie-up became a public lightning rod. Scrutiny increased in the second quarter as the Obama administration cracked down on inversions and Democratic lawmakers introduced legislation to stop the practice, but people close to the Medtronic-Covidien transaction said politics had little impact on it. Ishrak held fast, telling journalists that the goal wasn’t avoiding taxes but combining two complementary businesses poised to take advantage of changing global health care needs.

“There were a lot of motivators here, but I think fundamentally it was about the strategic evolution of the device industry and health care more broadly and the idea that ultimately medical technology companies need to be more than just pure product purveyors; they need to be solution providers,” says Luke Sarsfield, New York–based co-head of the Americas health care group at Goldman Sachs Group, which represented Covidien.

Dublin-based Covidien makes medical devices that are used in hospitals around the world; Minneapolis-based Medtronic is the top producer of technologies that go home with patients, such as insulin pumps and pacemakers. The merger will create a more well-rounded set of offerings, and although Medtronic is established in many countries, Covidien’s presence in China, India and Latin America is expected to give the combined company, which projects $27 billion in annual revenue postmerger, a significant boost. Covidien stock reached a new 52-week high of $101.66 on November 28, while Medtronic, which has traded at the upper end of its 52-week range since the deal announcement, closed at $73.87. This performance was bolstered by the European Union’s blessing of the merger the same day and U.S. regulatory approval on November 26.

Medtronic was represented by Perella Weinberg Partners and Bank of America Merrill Lynch, which will walk away with a combined $38 million in fees. Goldman Sachs stands to earn $58 million from the deal, which is slated to close in early 2015.

Top 10 Deals of 2014

  1. Kinder Morgan Goes All In
  2. Comcast Faces Screen Test
  3. Actavis Realizes Bigger Pharma Ambitions
  4. Medtronic, Covidien Home In on Tie Up
  5. Lafarge and Holcim Pour It On
  6. Alibaba Sets IPO Record with NYSE Debut
  7. Facebook’s Data-Driven Takeover of WhatsApp
  8. Altice Turns Paper Profit
  9. Eurobank Ergasias Spearheads a Greek Banking Revival
  10. Bond Issue Boosts U.K.'s Renminbi Trading Cred

Follow Kaitlin Ugolik on Twitter at @kaitlinugolik.