(Reuters) - U.S. medical device maker Medtronic Inc. (IW500/78) said it agreed to buy Dublin-based Covidien Plc (IW1000/394) for $42.9 billion and shift its executive headquarters to Ireland in the latest move by U.S. firms to harvest lower corporate tax rates abroad.
While the cash and stock deal will allow Medtronic to reduce its overall global tax burden, the Minneapolis-based company said on Sunday it was driven by a complementary strategy with Covidien on medical technology, rather than tax considerations.
"The real purpose of this, in the end, is strategic, both in the intermediate term and the long term," Medtronic Chief Executive Omar Ishrak said in an interview after the deal was announced. "It is good for the U.S. in that we will make more investment in U.S. technologies, which previously we could not."
Medtronic's corporate tax rate, now at around 18%, won't change much, Ishrak said.
The merger of Medtronic, the world's largest stand-alone medical device maker with a market value of over $60 billion, and Covidien, a maker of devices used in a range of surgical procedures, will create a close competitor in size to the medical device business of industry leader Johnson & Johnson Co. (IW500/17).
It broadens Medtronic's scope beyond its array of heart devices, spinal implants, insulin pumps and other products into areas such as weight-loss surgery and laparoscopic procedures. The expansion should allow it to better compete for business from hospitals, particularly in the United States where healthcare reform efforts and shrinking government reimbursement for medical procedures has kept pressure on device pricing.
The disparate businesses means there should not be significant antitrust concerns, industry analysts said.
"Beyond the financial rationale, the company expands dramatically, and it puts them in a whole bunch of areas they never were in before. It makes sense," said Jefferies analyst Raj Denhoy.
Denhoy estimated the deal would shave 2 to 3 percentage points off Medtronic's corporate tax rate, pointing to Covidien's rate of 16%.
The deal values each Covidien share at $93.22, paid for by $35.19 in cash and 0.956 Medtronic shares. The transaction represents a 29% premium to Covidien's closing stock price on Friday, Medtronic said.
The combination, which will leave Covidien shareholders owning about 30% of the combined company, is expected to result in at least $850 million of annual pre-tax cost synergies by the end of fiscal year 2018. Medtronic said it would keep its operational headquarters in Minneapolis and pledged $10 billion in U.S. technology investments over the next 10 years.
Acquisitions of companies aimed at lowering corporate tax rates, known as inversions, have historically been rare but are becoming more common.
Some U.S. lawmakers are concerned that the deals erode government revenue by giving corporations another tax-avoiding loophole. Two bills in the U.S. Congress and a White House proposal would make inversions harder to do, but neither has gained much traction. That could change if another major U.S. company or two tried to conduct inversions, tax lawyers and analysts said last week.
Two recently attempted inversions failed, but only after they refocused political attention on the strategy. U.S.-based Pfizer Inc's bid for rival British drugmaker AstraZeneca Plc was rejected, while the proposed combination of U.S. advertising firm Omnicom Group Inc with France's Publicis Groupe SA collapsed for non-tax-related reasons.
Democrats in Congress have called for new restrictions on these deals, with bills offered by Senator Carl Levin and his brother, Representative Sander Levin, both Michigan Democrats. President Barack Obama has a proposal similar to the Levins' bills. Republicans have expressed concern about inversions, but have not put forward legislation of their own.
Some lawmakers have said that anti-inversion curbs should be tackled as part of a comprehensive overhaul of the loophole-riddled U.S. tax code, but this is a difficult project that Congress has not tackled since 1986.
Medtronic's deal with Covidien is expected to close in the fourth quarter of 2014 or early 2015, Medtronic said.
Perella Weinberg Partners LP, Cleary Gottlieb Steen & Hamilton LLP and A & L Goodbody advised Medtronic, while Goldman Sachs & Co and Wachtell, Lipton, Rosen & Katz and Arthur Cox advised Covidien. Bank of America Merrill Lynch provided committed financing for the transaction.
-- Susan Kelly and Greg Roumeliotis, Reuters
Copyright Reuters, 2014 Additional reporting by Kevin Drawbaugh in Washington, D.C.; Editing by Michele Gershberg, Dan Grebler, Eric Walsh and Kenneth Maxwel
Video: History of Medtronic
This company-produced video traces Medtronic's history, including the physician collaboration that led to the world's first battery-operated external pacemaker. (2 minutes).
Susan Kelly and Greg Roumeliotis, Reuters
Copyright Reuters, 2014