JU 15, 2014,(www.nytimes.com/Michael J de la Merced)–Medtronic agreed on Sunday to buy Covidien for $42.9 billion, combining two of the world’s biggest medical device makers and helping Medtronic lower some taxes by gaining access to cash held overseas.
The deal, which is being structured as a so-called inversion, will relocate Medtronic from its headquarters in Minneapolis to Covidien’s corporate home in Ireland, where the tax rate is significantly lower than in the United States. But Medtronic argues that its tax rate will remain roughly the same, at about 18 percent.
Together, the two companies will become one of the biggest providers of medical devices in the industry, with 87,000 employees in over 150 countries.
Medtronic will pay $35.19 in cash and 0.956 of a share for each Covidien share.
Covidien shareholders will own about 30 percent of the combined company.
The transaction is also the latest in a wave of inversions, as American companies seek foreign acquisition targets in order to lower their corporate tax rate. Through such deals, the acquirers relocate to the target company’s home base — usually a lower-tax jurisdiction like Ireland or the Netherlands — and substantially reduce their taxes.
Companies have regularly complained about the United States’ corporate tax rate of 35 percent, one of the world’s highest. That puts them at a disadvantage to rivals in other countries, even if they have substantial American operations.
American tax laws, however, allow companies to move their corporate headquarters under certain circumstances, leading to a growing wave of inversions.
Health care companies have been among the most active in seeking out inversion deals. By far the most prominent attempt was Pfizer’s aborted $119 billion offer for AstraZeneca, which would have seen one of the United States’ best-known companies move its headquarters to Britain to lower its taxes.
Lawmakers have expressed more opposition to inversions in recent months, introducing bills meant to curb the practice. President Obama’s proposed budget has also included language meant to cut down on the corporate maneuver. But none of these legislative efforts are expected to gain traction in the near term.
Medtronic, in what appeared to be an effort to pacify critics of its move abroad and tamp down fears it would move too many jobs overseas, announced commitments to invest in the United States after the deal.
The company said it would commit to $10 billion in technology investments in America over the next decade, including for research and development and acquisitions.
“Although this is an inversion deal, it’s not about lowering tax rates,” Omar Ishrak, Medtronic’s chairman and chief executive, said in a telephone interview. “The difference is that through this combination, Medtronic can get access to the free cash flow that Covidien generates and deploy it in the U.S. There are larger technology acquisitions, innovations and R.&D. that we have not been able to do.”
The deal would also be the latest combination of medical device makers, which have sought to band together in response to the federal government’s health care overhaul. Such companies have been especially concerned by hospitals’ moves to cut costs.
Medtronic specializes in pacemakers and spinal treatments, among other therapies. Covidien, a former unit of Tyco, focuses on surgical equipment like ventilators, sutures and needles.
“We have complementary strengths, but a common vision,” Mr. Ishrak said. “We felt that together, we could accelerate our joint vision.”
Mr. Ishrak first met with his counterpart at Covidien, José E. Almeida, in April, with deal talks quickly accelerating.
Financing is being provided by Bank of America Merrill Lynch.
Medtronic is being advised by Perella Weinberg Partners and the law firms Cleary Gottlieb Steen & Hamilton and A & L Goodbody.
Covidien is being advised by Goldman Sachs and the law firms Wachtell, Lipton, Rosen & Katz and Arthur Cox.