Is Tax Avoidance the Main Motivation for the Medtronic Megadeal?

On June 15, Medtronic, the world's fourth largest medical device company, announced its plan to acquire Covidien plc for US$42.9 billion, creating the world's largest medical devices company.

The newly combined company expects to eliminate redundant public company costs and achieve $850 million in pre-tax cost savings by end of fiscal year 2018.

However, analysts at research and consulting firm GlobalData, believe the acquisition was primarily motivated by future market gains rather than tax inversion,

Niharika Midha, MSc, and Linda Tian, MSc, GlobalData's Analysts covering Medical Devices, say that the Medtronic- Covidien deal is “game-changing” and underscores the anticipated merger and acquisition wave within the medical devices industry, following the Zimmer-Biomet deal.

“Although tax inversion has been reported as the major driver behind the Medtronic deal, which sees the company's headquarters relocate from the US to Ireland, the strategic benefits of the deal will outweigh any tax savings," notes Midha.

The Medtronic-Covidien merger gives the new company a diversified medical devices portfolio, which will meet the growing hospital demand for holistic treatment options.

The deal allows Medtronic to explore new and growing sectors within medical devices, as Covidien recently acquired Given Imaging’s novel capsule endoscopy business for $860 million.

A further advantage of the deal will arise from Medtronic’s increased presence in the major emerging markets of Brazil, Russia, India and China, where Covidien experienced 25% growth in 2013 alone, according to GlobalData.

Most telling of all, for Midha and Tian, is the minimal overlap between the two companies’ product lines, which will enable Medtronic to capitalize on the growing trend of hospitals seeking suppliers that offer wider ranges of products at lower prices.

“The healthcare sector is under stress due to multiple burdens, with increased margin pressure having the most significant impact on hospitals’ sustainable growth," said Tian.

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