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No Local Changes Seen After Medtronic Buy

Medtronic Inc. is likely to keep its Orange County operations basically intact, even after it wraps up a multibillion-dollar acquisition that could make it one of the top five medical device makers by local employment.

Minneapolis-based Medtronic said roughly two weeks ago that it would buy fellow device maker Covidien PLC for $42.9 billion in cash and stock. The deal is scheduled to close in the fourth quarter or early next year and create a company with annual sales of $26 billion a year, second only to New Brunswick, N.J.-based behemoth Johnson & Johnson in the medical device arena.

Medtronic and Covidien have some 1,370 workers between them in Orange County. The combined company would rank 66th overall in area employment if no job cuts are made, ahead of some better-known local names such as Hyundai Motors of America, Del Taco and the Los Angeles Angels of Anaheim.

Workers

Medtronic employs an estimated 700 people at its “center of excellence” for tissue heart valves in Santa Ana. It competes with Irvine-based Edwards Lifesciences Corp. in the surgical and less-invasive replacement valve markets; lines include Hancock II, Contegra, Mosaic, and Medtronic CoreValve.

Covidien is based in Ireland, operates from Massachusetts, and has 670 workers in Orange County, the majority of whom work at its neurovascular business in the Irvine Spectrum. That business makes products such as the Pipeline, which restores natural blood flow past wide-neck brain aneurysms, or artery ballooning, and the Alligator, which retrieves foreign bodies from arteries in the brain.

“It’s too early to say” what will become of Orange County’s operations, said Fernando Vivanco, a Medtronic spokesperson.

He emphasized, however, that Medtronic is buying Covidien for growth and that “there is very little overlap between the businesses.”

Buying Covidien “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,” said Medtronic’s chief executive, Omar Ishrak, who will serve in the same role after the deal closes.

Covidien Chief Executive José Almeida said the combined company would “provide patients, physicians and hospitals with a compelling portfolio of offerings that will help improve care and surgical performance.”

Medtronic will move its headquarters to Ireland once the deal is completed and change its name to Medtronic PLC. It said in a Securities and Exchange Commission filing that it didn’t specifically pursue Covidien for tax inversion purposes.

Analysts

Analysts note that Covidien and Medtronic’s product ranges complement each other.

Medtronic’s strengths are cardiovascular, spine, diabetes and surgical technologies, while Covidien is adept at surgical supplies, soft-tissue repair, vascular devices and monitoring equipment, according to analyst Larry Biegelsen of Wells Fargo Securities.

“The changes taking place in health care around the world will force medical device companies to get bigger because they would need scale to negotiate with payers and providers on an equal footing,” Biegelsen said in a research note.

“You’re seeing a lot of pockets of consolidation with healthcare. With increased size, [Medtronic] can also afford to take market share and compete more on price,” David Kaplan, a credit analyst with Standard & Poor’s, told industry publication Modern Healthcare.

Having Covidien in Medtronic’s fold will help it reach a broader patient population in emerging markets, according to Citigroup analyst Matthew Dodds. He gave China as an example in a research note, saying Medtronic’s “sophisticated implants” are well suited to upmarket urban hospitals in that country, but even less advanced hospitals would be likely to buy sutures and staples made by Covidien and used in general surgeries.

Analyst Sean Lavin of San Francisco-based BTIG LLC wrote in a research report after the June 15 deal announcement that he saw no obstacles to Medtronic finishing the deal.

“We feel the 30% premium on a stock near an all-time high is very likely to be accepted. We do not expect another bidder,” Lavin said, mentioning that Johnson & Johnson has too many overlapping products with Covidien to make a play for it.

Preparation

Medtronic has taken some steps to prepare for the integration.

It tapped Geoff Martha, its senior vice president, strategy and business development, to lead the integration of Covidien into Medtronic. Martha, who has been with Medtronic since 2011, “will serve as the primary liaison between the companies’ leadership teams,” Ishrak said in an employee memorandum filed with the SEC.

The integration team will have employees from Covidien and Medtronic, Ishrak added.

Covidien, which was once part of conglomerate Tyco, boosted its Orange County presence in 2010 after paying $2.6 billion to buy Ev3 Inc., a Minnesota-based device maker with about 400 Irvine workers. In 2012, it spent $108 million for Newport Medical Instruments Inc., a Costa Mesa-based ventilator maker.

Medtronic’s OC heart valve unit grew out of Hancock Laboratories, an early local device company started by engineer and industry pioneer Warren Hancock in 1969. Hancock, like many of the county’s other seminal device entrepreneurs, emerged from the original Edwards Laboratories, which was started by Santa Ana electrical engineer Miles “Lowell” Edwards.

Johnson & Johnson bought Hancock Laboratories in 1979. Medtronic picked up the Hancock heart valve portfolio from Johnson & Johnson in the mid-1980s.

Medtronic spent $700 million in 2009 to buy CoreValve Inc., which was based in Irvine.

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