The $43 billion acquisition of Covidien (NYSE:COV) by Medtronic (NYSE:MDT) flunks M&A 101, but looking at the deal by the book is the wrong way to think about it, a senior Medtronic executive said yesterday. That’s because, on the surface, there are few synergies to cover the premium on the deal, according to Chris Cleary, Medtronic’s vice president of corporate development.
"There’s very little overlap," Cleary told an audience of medtech executives in Albany, N.Y. yesterday. "The very thing that makes it an approvable transaction by most of the regulatory agencies makes it challenging, because 1 of things you learn in M&A 101 is that the premium you pay has to be covered by the synergies realized over time. On a net present basis, you have to get your money back over a reasonable period of time, and if there are no synergies than that’s really tough. Which turned out to be a horrible way to think about the deal."
A better prism for the deal, Cleary said, is something Medtronic executives came to admire about Covidien during the due diligence period, which they now refer to as a "hidden synergy."
Medtronic has a history of placing large bets on technology that must go through the FDA’s stringent pre-market approval program, then basking in massive returns on those bets by assuming a market leadership position once the product wins PMA, Cleary explained, pointing to Medtronic’s acquisition of CoreValve as a prototypical Medtronic move.
The company has a leading position in the TAVI market, even if it had to pay a massive premium in legal costs to get there, he said. This summer the company agreed to pay Edwards Lifesciences (NYSE:EW) $750 million settlement to end a protracted patent war.
Those massive bets, while fruitful, also expose the company to significant financial risk, Cleary said. On the other hand, Covidien has managed to gain significant share in the spaces it serves by leveraging the FDA’s less-stringent 510(k) path to market, then using its aggressive sales and marketing approach to gain share.
"Covidien has proven an ability to scrap its way to market share," he said. "They’ve been more financially scrappy than us. They haven’t been under the shower of PMA gold, where you have to really hit 1 out of the park."
The push-and-pull of the 2 styles should serve the combined entity well, Cleary added, because Medtronic can now hedge some of its home-run bets with the quicker market approach of Covidien.
Covidien’s commitment to emerging markets is another synergy, he said, pointing out that the combined company’s $3.7 billion in emerging market sales alone would make it the equivalent of the 15th largest medtech company in the world.
The deal does have its drawbacks, though. Cleary said Medtronic CEO Omar Ishrak knew going in that it would likely result in blow-back from shareholders and politicians alike and that there was a good chance the CEO would end up testifying before Congress to defend the inversion portion of the deal.
And the personal costs of the 1½ month sprint to complete the deal were intense, Cleary said.
"The deal came together at the expense of all of my brown hair," he said with a laugh.
Cleary was a keynote speaker at MedTech 2014, the annual conference for New York state’s medical device industry council.