CHICAGO (Reuters) – Medtronic Inc on Monday said it will remain in the market for promising new technologies even as it absorbs Dublin-based medical device maker Covidien Plc in a $42.9 billion cash-and-stock deal.
A day after announcing the agreement to buy Covidien, Medtronic executives told analysts on a conference call that the additional cash flow generated by combining the two companies would expand the budget for acquisitions and minority investments, as well as internal research and development.
“There still are plenty of opportunities for us to focus on other acquisitions, other innovation. That momentum doesn’t need to stop, even in this integration period,” Medtronic Chief Financial Officer Gary Ellis said on the call in response to a question.
Medtronic has been especially keen to expand beyond selling devices into providing advisory services to hospitals, and would consider acquisitions that would help it develop that business, Chief Executive Omar Ishrak said.
“To the degree we can bring in other acquisitions to support that further, we will look closely at that,” Ishrak said.
The company currently has consulting contracts in Europe that focus on cardiac catheterization laboratories, which are specialized areas of the hospital where heart procedures such as stent implants are performed.
Analysts said the blockbuster deal could speed further consolidation in the medical device industry, which has struggled to reaccelerate revenue growth since the global economic downturn hit.
“This consolidation phase of the medical device evolution makes sense to us, and it should provide increased pricing stability and leverage for the companies taking the leap. For those not yet participating, we would expect more to come,” said BMO Capital Markets analyst Joanne Wuensch in a note to clients.
Medtronic is acquiring Covidien in a so-called inversion transaction that allows it to reincorporate in Ireland to take advantage of lower tax rates.
Analysts said the strategy will enable Medtronic to access cash generated through sales outside the United States and now held overseas without paying a penalty for repatriating the money. This benefit overshadows the modest reduction in the overall corporate tax rate that the company is forecasting.
“We view the new access to (overseas) cash as the principle driver of the inversion strategy,” Cowen & Co analyst Joshua Jennings said.
Medtronic expects the acquisition to lower the corporate tax rate of the combined company by 1 to 2 percentage points, Ellis said. Medtronic’s corporate tax rate is now about 18 percent.
Medtronic also said Monday it would maintain its prior forecast for fiscal 2015 earnings in the range of $4 to $4.10 a share.
Shares of Medtronic fell about 2 percent to $59.44 in morning trading. Covidien stock was up 20 percent at $86.40.
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