Medtronic's $42.9B takeover of Covidien challenges J&J, avoids U.S. taxes

Medical device maker Medtronic said Sunday that it will buy rival Covidien for $42.9 billion, which will help Medtronic challenge Johnson & Johnson and avoid paying U.S. corporate taxes.

Medtronic is headquartered in Minneapolis. Covidien's leadership operates from a facility south of Boston, but it is officially registered in Ireland, which has much lower corporate taxes than the United States. Covidien had been in Bermuda, another tax haven. Medtronic will keep operational control in Minneapolis, but officially register in Ireland.

The deal, first reported Saturday by the Wall Street Journal, is another example of a health-care company trying to acquire another at least partly to shift tax domicile to Ireland or other low-tax countries. In the lexicon of accounting, it is called a tax inversion.

Pfizer was recently thwarted in its $120 billion attempt to buy AstraZeneca, which is based in the United Kingdom and pays less tax than Pfizer does with headquarters in Manhattan. In November, Endo Pharmaceuticals bought Paladin Labs, Inc., which allowed it to register in Ireland, though it left most of its operational leadership in Malvern.

Omar Ishrak, borad chairman and chief executive officer of Medtronic, will talk with investment analysts in a conference call Wedneday morning starting at 8 a.m.

Besides the tax appeal of the deal, Medtronic wanted to be a larger company with more products to offer because it hopes that will make it more of a one-stop shop for hospitals to buy medical devices and other services.

That was the rationale for J&J to buy Synthes for $19.7 billion, a deal announced in 2011 and closed in 2012. Synthes, which was officially registered in Switzerland, had its operational headquarters in West Chester. Like Covidien, Synthes made power tools used to install the nails and screws, rods and plates that it also made to repair broken bones.

J&J's medical device and diagnostics division had $7 billion in revenue in the first quarter of 2014, flat compared to the same period in 2013. For all of 2013, medical devices brought in $28.49 billion for J&J, according to its annual report. J&J's first-quarter (10-Q) filing with the SEC is here and the annual report (10-K) is here.

J&J has three divisions: pharmaceuticals, medical devices and non-prescription consumer products. CEO Alex Gorsky has resisted suggestions to split up the pieces of the company because he has said he wants J&J to become the first and only supplier to hospitals and other healthcare facilities.

Medtronic had $16.59 billion in revenue for the fiscal year ending June 30, 2013. The financial numbers filed by Medtronic's with the SEC in its last annual report are here.

Covidien had $10.24 billion in revenue for the fiscal year ending Sept. 27, 2013. It 10-K annual report filed with the SEC is here.

"We are excited to reach this agreement with Covidien, which further advances our mission to alleviate pain, restore health and extend life for patients around the world," Ishrak said in a statement. "This acquisition will allow Medtronic to reach more patients, in more ways and in more places. Our expertise and portfolio of services will allow us to serve our customers more efficiently and better address the demands of the current healthcare marketplace. We also look forward to welcoming the Covidien team to Medtronic and working together to improve healthcare outcomes globally."