September 17, 2014 by Brian Johnson
A senior executive at Medtronic, vice president of corporate development Chris Cleary, explains how Covidien played “scrappy” upstart all the way to a $43 billion payout.
The $43 billion acquisition of Covidien (NYSE:COV) byMedtronic (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.