Cash-rich Medtronic on acquisition spree

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When you’re the richest kid on the block, it’s easy to make friends.

For Medtronic Inc. (NYSE:MDT), those friends happen to be investment bankers and venture capitalists.

The world’s largest medical device maker has been on an acquisition tear of late, using its considerable cash hoard to buy nine companies since 2009, including ATS Medical Inc. and CoreValve Inc. Medtronic also holds minority stakes in 60 companies, a total investment of $360 million.

Feeding the Fridley, Minn.-based company’s appetite is a weak economy that has depressed company valuations and laid waste to demand for initial public offerings. As a result, Medtronic is winning some attractive deals from investors looking hard to find exits.

“It’s a time for Medtronic to be opportunistic,” said vice president of corporate development Chad Cornell, who oversees the company’s acquisition and investment portfolio. “There are a lot of economic factors weighing on valuations. We’re in the fortunate position of having a strong balance sheet,” he said.

For example, Medtronic recently paid $370 million, or $4 a share, to acquire heart valve maker ATS Medical (NSDQ:ATSI), whose share price hadn’t topped $4 in five years. Last month, Medtronic said it would pay $123 million or $6.50 a share to buy biologics maker Osteotech Inc. (NSDQ:OSTE). Prior to the deal, Osteotech’s shares were off 20 percent since September 2009.

Medtronic is hardly alone in its shopping spree. Deep pocketed Minnesota companies like 3M Co. (NYSE:MMM) and UnitedHealth Group Inc. (NYSE:UNH) have made several acquisitions this year. St. Jude Medical Inc. (NYSE:STJ) paid $90 million to purchase LightLab Imaging Inc. Earlier this month, St. Jude said it will spend $60 million to acquire a 19-percent stake in CardioMEMS, a company developing wireless heart monitoring technology for heart failure.

Across the world, mergers and acquisitions are starting to heat up, especially in healthcare. In the first half of 2010, the industry saw 319 deals worth $52.8 billion, the most active sector in the world, according to Dealogic.

Despite the M&A frenzy, Medtronic takes disciplined approach to deal making, mixing longer and shorter term bets the same way a money manager allocates assets in an investment portfolio, Cornell said.

Medtronic’s acquisitions falls into two categories: “tuck-in” deals that can immediately add revenue to existing businesses or technology-driven purchases that provide Medtronic with expertise they don’t have.

For example, Medtronic spent over $1 billion to acquire Irvine, Calif.-based CoreValve Inc. and Ventor Technologies Ltd. in Israel. Both companies are developing ways to implant replacement heart valves through catheters snaked up the groin instead of cracking open the chest in major surgery.

In 2008, Medtronic acquired CryoCath Technologies Inc. for about $380 million. The Canadian company makes catheters that can deliver subzero temperatures to the heart. The technology restores normal electric signals by freezing the tissue or pathways behind the irregular quivering.

Those deals represented advanced technologies in development and had not received regulatory approval in the United States, Cornell said.

On the other hand, ATS Medical and Osteotech were already generating sales in areas that Medtronic competes, he said.

Medtronic also looks to acquire stakes in promising startups, especially those struggling to raise capital. Medtronic can provide the necessary financial resources and expertise to complete clinical trials, gain approval from the Food & Drug Administration and win reimbursement from payers.

“There’s a lot of growth opportunities in technology that are not necessarily correlating with the economy,” Cornell said.

Cornell describes Medtronic as “an evergreen investor.” While it does not operate a separate venture arm, Medtronic does boast an Internal Ventures Group that advises the company on its research and development pipeline.

Will Medtronic pull the trigger on a mega deal? CEO Bill Hawkins has consistently said the company is focusing on smaller, tuck-in deals.

Cornell doesn’t rule out a big acquisition but says such a deal invites more scrutiny from top Medtronic executives.

“Size is obviously a factor but it’s not what we start with,” he said.

The driving force behind any deal is “how can we add value?” Cornell said. “That’s the key lens.”

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