Different but complementary: Medtronic’s strategic thinking
The obvious reasons for Medtronic’s buyout of Covidien are to do with accessing non-US cash and building scale, but the more detailed strategic rationale also bears examination. Medtronic has signalled its interest in the hospitals and surgery sectors repeatedly over the past few years with a deal to run cardiology services in the UK’s NHS as well as several takeouts of surgery companies – though it is somewhat surprising that it is willing to pursue the single biggest medtech deal ever in order to bolster its offerings in these areas.
Covidien has been angling for a buyout since spinning off its Mallinckrodt pharmaceuticals arm last spring, and its size and focus meant that only Johnson & Johnson or Medtronic were realistic buyers. Consider Medtronic’s synergies with Covidien in cardiovascular and neurology, and the merger begins to look almost inevitable (see graphs below).
It is fair to say that the move was a bit of a curveball when compared with the other recent medtech megamerger. Zimmer and Biomet have a sizeable overlap and there the plan was for the buyer to build on its established products and expertise (Zimmer and Biomet hook up for second orthopaedics megamerger, April 24, 2014).
But companies do not just merge because they are similar: sometimes they do it because they are different. And, of the six medtech companies larger than Covidien, Medtronic is by far the clearest candidate as a buyer.
Siemens, GE Healthcare and Roche are all too specialised to be able to integrate Covidien successfully, and Abbott Laboratories, active in just four therapy areas, is probably in the same situation. J&J and Medtronic are both sufficiently diversified already that adding wholly new capabilities will not throw them off balance. But J&J has been moving towards specialisation rather than diversification, selling off its diagnostics business to the Carlyle Group earlier this year.
Medtronic’s interest in the hospitals sector dates back at least a year, with the company signing partnerships with the UK’s NHS under which it will manage the catheterisation labs of two hospitals, one in London and another in Manchester (Fresenius deal underlines growing importance of hospital sector, September 16, 2013). Its moves to add to its surgical business date further back, to the acquisitions of Peak Surgical and Salient Surgical in 2011 – the first acquisitions the company made under its current CEO, Omar Ishrak.
The great thing about hospital supplies is that it gives the company an in with the purchasers. Post-merger, the new company will be able to offer a range of devices as varied as J&J’s (see thumbnails above), and Medtronic would be able to offer hospital administrators a one-stop shop for many of their other needs: devices classified as cardiology or orthopaedics but used in a hospital, such as guidewires or spinal implants, for example.
Medtronic may be trying to position itself to actually benefit from hospital purchasing pressures: if it can cut deals with administrators for bulk purchases across different therapies, it could cut its rivals out.