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Analyzing Medtronic’s Acquisition of Covidien

Sarah Collins

Medtronic’s Valuations and Growth Story: What Can Investors Expect?

(Continued from Prior Part)

Overview

Medtronic’s (MDT) acquisition of Covidien in January 2016 positioned the company as the biggest player in the medical device industry. It almost doubled the size of its business. The strategic fit of the acquisition created opportunities for increased cash flows and reduced costs due to operational efficiency by the complementary businesses and product lines. For details on the acquisition, read Sizing up Medtronic-Covidien, the Biggest Deal in the Medical Device Industry.

Integration initiatives

After the execution of the biggest acquisition deal in the medical device industry, Medtronic strives to preserve growth and sustainability of both companies’ legacy businesses. It’s focused on optimizing its operations through a common enterprise resource planning platform to improve efficiency across the organization. The company plans to consolidate its manufacturing operations to improve productivity.

Portfolio enhancements

The Medtronic-Covidien acquisition accelerated the company’s efforts to transform Medtronic from a product-focused business to a value-based healthcare provider. Now, the company has a broader and more comprehensive product portfolio that provides end-to-end service solutions to its customers. We’ll discuss some of the products and services leveraging the capabilities of the two companies. In the peripheral vascular segment, PACT Admiral drug-coated balloons—the leading product in the US market and other similar products—strengthened the Market reach due to enhanced sales capabilities. Moreover, the company launched the operating room managed services program in 2H15 to leverage its CathLab services business and Covidien’s operating room technology capabilities and expertise. Medtronic signed five deals amounting to $140 million in cumulative revenue over a period of seven years.

Acquisition synergies

Medtronic expects to exceed its fiscal 2016 cost synergy benefits from the deal and generate higher savings than the original estimates of $300 million–$350 million. The company expects to achieve a minimum of $850 million in synergies by the end of fiscal 2018.

Some of the other major players that recently entered into some of the biggest acquisitions in the US medical device industry include Zimmer Biomet Holdings (ZBH), Stryker (SYK), and Becton Dickinson (BDX). Investors seeking to participate in Medtronic’s growth can invest in the iShares U.S. Medical Devices ETF (IHI). It has ~14.7% of its total stocks in Medtronic.

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