Medtronic deal could create more price competitiveness
Medtronic’s plan to buy Covidien is likely a move to lower its taxes and strengthen its ability to withstand price pressure from hospital customers by creating a go-to seller of a wide range of medical supplies.
The proposed $42.9 billion deal, which the two publicly traded firms are discussing, would pair Medtronic, best known for high-cost heart devices and spine products, with Covidien, an Ireland-domiciled supplier of midmarket products used in surgery and patient monitoring.
The combined company would generate about $26 billion in total sales, making it the world’s second-largest medical device company after Johnson & Johnson. Both boards have endorsed the deal, which would require regulatory approval.
One reason cited for the deal is to take advantage of Ireland’s lower corporate tax rate by moving Medtronic’s headquarters from Minneapolis to Dublin, where Covidien is based— though the latter’s U.S. headquarters is in Mansfield, Mass. Ireland’s main corporate tax rate is 12.5%, compared with 35% in the U.S. Medtronic reported an effective tax rate of 18.5% for fiscal 2013. But market analysts and others say the proposed merger also is driven by purchaser pricing pressure, forcing manufacturers to eye consolidation. “With increased size, (Medtronic) can also afford to take market share and compete more on price,” said David Kaplan, credit analyst with ratings agency Standard & Poor’s.
It’s unclear if the deal will lead to higher prices or if the new company will lower its prices in some categories to boost market share.
The combined company would generate $26 billion in total sales.