Medtronic's Financial Performance: A Review of the Covidien Acquisition

Medtronic, a medical device company, acquired Covidien in 2015, which improved its financial performance, with ROE increasing by 65% and ROA improving by 73%. The acquisition added $10B in revenue and $20.7B in equity, allowing Medtronic to tap new markets and increase profitability. While current and quick ratios declined, the debt ratios improved slightly. Revenues increased from $16.59B in 2013 to $28B in 2016, but income statement deterioration was noted due to the Affordable Care Act's taxes and regulations. Despite this, Medtronic outperformed Merck, a similar company, and its stock price has increased by 23% since 2016.

Medtronic Inc. Merger With Covidien: FINC 5880 Final Paper
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Medtronics Inc.
Merger With
Covidien
Student’s Name:

Medtronic Inc. Merger With Covidien: FINC 5880 Final Paper
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Introduction:
Medtronic Inc., a US based company, in 2014 decided to purchase Covidien PLC,
based in Ireland, and move the headquarters to Ireland to become Medtronic, PLC. The
purchase was almost solely motivated by the tax savings afforded to companies based in
Ireland at a time when the US corporate income taxes were far higher and the tax laws
punished medical equipment companies further to pay for the new healthcare system. Valued
at approximately $43 billion US, according to the Trefis Team at Forbes in their June 16,
2014 article, this was a very rich deal aimed squarely at the balance and the reach it would
provide. The merger closed in January of 2015 and with the fiscal year end of Medtronic
being in April, the balance sheet was reflected in the 2015 annual report and the full impact
of the acquisition with the income statement was seen in the 2016 annual report.
Medtronic was also motivated by the strong balance sheet of Covidien, including
billions in cash, that was not producing a significant return on assets or equity yet provided
complimentary products and services. There did not seem to be an overlap of products or
services which meant few loss of employees while the reach of the combined companies
would be far greater. There were clear synergies and efficiencies to gain. As Sarah Collins
stated in her April 1, 2016 article in marketrealist.com, “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.”
During the same, in 2015, Medtronic also acquired Diabeter, a diabetes research
center and clinic in the Netherlands. Based on the balance sheet’s growth of the goodwill line
item, it’s clear that Medtronic is attempting to increase reach and revenue through
acquisition.
Company overview:
Medtronic was the largest provider of products in the cardiovascular industry,
however the industry was moving towards a full value solutions approach and Medtronic did
not have the time to develop that on their own. Medtronic was the largest medical equipment
provider in the US. With the smaller acquisitions and the large $43B acquisition of Covidien,

Medtronic Inc. Merger With Covidien: FINC 5880 Final Paper
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Medtronic soon provided other services such as emergency room management and
administration at a lower cost than what most hospitals could do on their own. The combined
entities would have access to over 150 countries with medical equipment, supplies, and
services with over $28B in revenues in 2016. As a result of the large cash position mostly
held overseas, Medtronic committed to a $10B investment in research in the US by 2018.
For this report, a ratio analysis study has been performed for Medtronic, however, the
financial data of Covidien for 2013 was used to reflect the before and after consequences of
the merger. Merck was used for size standard as little industry wide data was used. The
industry is consolidating and there although they are all headed in the same direction, few
have identical assets producing similar amounts of services and products exclusive or
inclusive of one another.
Ratio analysis:
Ratio analysis is used to analyze a company’s financial position, performance, and a
quantifiable method for confirming management’s statements. Following are the ratio
analysis study of Medtronic including the financial data of Covidien prior to the merger and
Merck for comparison. The data was from their annual corporate report without taking into
account any operations that may have been or are being planned to be discontinued. The
figures in the table with the financial statement figures are in US Dollars. It is important to
note that the merger was closed in January 2015 and Medtronic’s fiscal year end is April.
Therefore, the balance sheet reflected the changes in the FYE 2015 figures and the full affect
of the income statement was seen in FYE 2016.
Financial Data for Medtronic, PLC
Description
I/S
Merged
B/S
Merged
Jan
%
Chang
e
Yearend Apr-16 Apr-15 Apr-14 Apr-13
2016 to
2014
Revenue 28833 20,261 17,005 16,590 70%
Cost of
goods sold 9142 6,309 4,333 4,126 111%
Gross profit 19691 13,952 12,672 12,464 55%
Operating
profit 5291 3,766 3,813 4,402 39%
Net profit 4336 41%

Medtronic Inc. Merger With Covidien: FINC 5880 Final Paper
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2,675 3,065 3,467
EBITDA 9,921 5,191 4,830 5,156 105%
Interest (net) 1386 280 108 151 1183%
Taxes Paid 1379 632 521 537 165%
Inventory 3473 3,463 1,725 1,712 101%
Current
assets 23600 30,844 21,210 17,852 11%
Receivables 5562 5,112 3,811 3,727 46%
Current
liabilities 7165 9,173 5,559 3,950 29%
Payables 1709 1,610 742 681 130%
Equity 52063 53,230 19,443 18,671 168%
Total
liabilities 47719 53,455 18,500 16,229 158%
Total assets 99782 106,685 37,943 34,900 163%
Restructuring
Charges 290 237 78 172 272%
Litigation
Charges 26 42 770 245 -97%
Acquisition
Related 283 550 117 (49) 142%
Amortization 1931 733 349 331 453%
Depreciation 889 573 501 488 77%
Total Debt 31240 36,186 11,928 10,651 162%
Interest
Expense 1386 578 394 333 252%
Medtronic
Stock $ 211.37 203.06 149.62 116.80 41%
S&P 500 168.63 169.15 145.85 121.27 16%
S&P Med
Equip Index 187.89 177.23 134.57 113.00 40%
Medtronic
shares out 1425.9 1,109.00 1,013.60
1,
027.50 41%
Net Income
per share 3.04 2.41 3.02 3.37 1%
Medtronic 40%

Medtronic Inc. Merger With Covidien: FINC 5880 Final Paper
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P/E ratio 69.51 84.18 49.48 34.62
Medtronic
Equity/share 36.51 48.00 19.18 18.17 90%
Medtronic
Price/Book 5.79 4.23 7.80 6.43 -26%
Medtronic
Tax Rate 31.80% 23.63% 17.00% 15.49% 87%
After Tax
Cost of Debt 3.03%
Cost of
Equity 9.50%
Amount of
Equity 62.50% 52063 Beta 1
Not readily
available
Amount of
Debt 37.50% 31240
Risk Free
rate 2.50%
WACC 7.07%
Expected
Mkt Ret 12.00%
Description Formula Medtronic
2016 2015 2014 2013
Net margin
Net
profit/revenu
es 15.04% 13.20% 18.02% 20.90%
Return on
equity
(Dupont
Model)
Net
profit/Equity 8.33% 5.03% 15.76% 18.57%
Inventory
turnover
(Inventory/
COGS)*365 138.7 200.3 145.3 151.4
Current ratio
Current
assets/current
liabilities 3.29 3.36 3.82 4.52
Quick Ratio
Current
assets-
Inventory/cur
rent liabilities 2.81 2.98 3.51 4.09

Medtronic Inc. Merger With Covidien: FINC 5880 Final Paper
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Working
Capital CA-CL 16,435 21,671 15,651 13,902
Receivables
collection
period
Receivables/
Total
sales*365 70.41 92.09 81.80 82.00
Payables
collection
period
Payables/
Cost of
sales*365 68.23 93.14 62.50 60.24
Asset
turnover ratio
Total sales/
Total assets 0.29 0.19 0.45 0.48
Debt to
Equity Ratio Debt/ Equity 0.92 1.00 0.95 0.87
Debt to
assets
Debt/ Total
assets 0.31 0.34 0.31 0.31
Debt ratio
Total
Liab/Total
Assets 0.48 0.50 0.49 0.47
Return on
assets
Net profit /
Assets 0.04 0.03 0.08 0.10
Interest on
Debt
Interest
Expense/Tota
l Debt 4.44% 1.60% 3.30% 3.13%
Interest
Coverage
Net
Income/Inter
est Expense 3.13 4.63 7.78 10.41
Following are the income statements in detail for the 3 companies (also see Excel
Spreadsheets in Excel file):
Medtronic INCOME STATEMENT
Fiscal year ends in
December.
Apr-
16
% of
sales
Mer
ck
12-
31-
201
6
Apr
-15
Covid
ien
Sep
2014
Apr
-14
% of
sales
201
3
Revenue
288
33
398
07
202
61 2686
170
05
165
90
Cost of revenue
914
2
31.7
1%
133
63
33.5
7%
630
9 1042
433
3
25.4
8%
412
6
Gross profit
196
91
68.2
9%
264
44
66.4
3%
139
52 1644
126
72
74.5
2%
124
64
Operating expenses
0.00
%

Medtronic Inc. Merger With Covidien: FINC 5880 Final Paper
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Sales, General and
administrative
946
9
32.8
4%
958
9
24.0
9%
690
4 865
584
7
34.3
8%
569
8
Research and
Development
222
4
7.71
%
678
4
17.0
4%
164
0 133
147
7
8.69
%
155
7
Other expenses
270
7
9.39
%
0.00
%
164
2 20
153
5
9.03
% 807
Operating income
529
1
18.3
5%
100
71
25.3
0%
376
6 626
381
3
22.4
2%
440
2
Interest Expense
138
6
4.81
% 693
1.74
% 280 48 108
0.64
% 151
Other income (expense) -431
-
1.49
%
541
2
13.6
0% 0 69 0
0.00
% 0
Income before income
taxes
433
6
15.0
4%
396
6
9.96
%
348
6 509
370
5
21.7
9%
425
1
Provision for income taxes 798
2.77
% 718
1.80
% 811 640
3.76
% 784
Minority interest
0.00
% 220
0.55
% 0
0.00
% 0
Other income
0.00
% 452
1.14
% 0 0
0.00
% 0
Net income from
continuing operations
353
8
12.2
7%
392
0
9.85
%
267
5 509
306
5
18.0
2%
346
7
Other
0.00
%
0.00
%
800
0
47.0
4%
700
0
Net income
353
8
12.2
7%
392
0
9.85
%
267
5 509
110
65
65.0
7%
104
67
The balance sheets are as follows:
Medtronic Complete Balance Sheets
Fiscal year ends in December.
201
6
Div
by
Total
Asset
s
Mer
ck
12-
31-
201
6
Div
by
Total
Asset
s 2015
Covid
ien
2014
201
4
201
3
Assets
Current assets
Cash
287
6
2.88
%
651
5
6.83
% 4843 1567
140
3 919
Investments
975
8
9.78
%
782
6
8.21
%
1463
7 16
128
38
102
11
Tax Assets 697
0.70
%
0.00
% 1335 438 736 539
Inventories 347 3.48 486 5.10 3463 1408 172 171

Medtronic Inc. Merger With Covidien: FINC 5880 Final Paper
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3 % 6 % 5 2
Prepaid expenses
123
4
1.24
%
438
8
4.60
% 1454 493 697 744
Accounts Receivable
556
2
5.57
%
701
9
7.36
% 5112 1532
381
1
372
7
Total current assets
236
00
23.65
%
306
14
32.10
%
3084
4 5454
212
10
178
52
Non-current assets
Property, plant and equipment
484
1
4.85
%
120
26
12.61
% 4699 2024
239
2
249
0
Land
0.00
% 0 0
Fixtures and equipment
0.00
%
0.00
% 0 0
Other properties
155
9
1.56
%
121
51
12.74
% 0 0
Property and equipment, at
cost
0.00
%
0.00
% 0 0
Accumulated Depreciation
0.00
%
0.00
% 0 0
Property, plant and
equipment, net
0.00
%
0.00
% 0 0
Goodwill
415
00
41.59
%
181
62
19.04
%
4053
0 8851
105
93
103
29
Intangible assets
268
99
26.96
%
173
05
18.14
%
2810
1 3282
228
6
267
3
Other long-term assets
138
3
1.39
%
511
9
5.37
% 2511 1090
146
2
155
6
Total non-current assets
761
82
76.35
%
647
63
67.90
%
7584
1 15247
167
33
170
48
Total assets
997
82
100.0
0%
953
77
100.0
0%
1066
85 20701
379
43
349
00
Liabilities and stockholders'
equity
Liabilities
Current liabilities
0.00
%
0.00
%
Short-term debt 993
1.00
%
102
09
10.70
% 2434 1009
161
3 910
Capital leases 0
0.00
% 0
0.00
% 0 0 0 0
Accounts payable
170
9
1.71
%
280
7
2.94
% 1610 501 742 681
Taxes payable 566
0.57
%
0.00
% 1054 60 183 104
Other current liabilities
389
7
3.91
%
418
8
4.39
% 4075 1718
302
1
225
5
Total current liabilities 716 7.18 172 18.04 9173 3288 555 395

Medtronic Inc. Merger With Covidien: FINC 5880 Final Paper
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5 % 04 % 9 0
Non-current liabilities
Long-term debt
302
47
30.31
%
243
03
25.48
%
3375
2 4035
103
15
974
1
Capital leases 0
0.00
% 0
0.00
% 0 0 0
Deferred taxes liabilities
663
2
6.65
%
0.00
% 7176 878
172
9
150
8
Minority interest 0
0.00
% 220
0.23
% 0 2221 0 0
Other long-term liabilities
367
5
3.68
%
135
62
14.22
% 3354 1037 897
103
0
Total non-current liabilities
405
54
40.64
%
380
85
39.93
%
4428
2 8171
129
41
122
79
Total liabilities
477
19
47.82
%
552
89
57.97
%
5345
5 11459
185
00
162
29
Stockholders' equity
0.00
%
0.00
%
Common stock 0
0.00
%
178
8
1.87
% 0 100 102
Treasury Stock 0
0.00
%
-
583
3
-
6.12
% 0 0
Retained earnings
539
31
54.05
%
441
33
46.27
%
5441
4
199
40
190
61
Accumulated other
comprehensive income
-
186
8
-
1.87
% 0
0.00
%
-
1184
-
597
-
492
Total stockholders' equity
520
63
52.18
%
400
88
42.03
%
5323
0 9242
194
43
186
71
Total liabilities and
stockholders' equity
997
82
100.0
0%
953
77
100.0
0%
1066
85 20701
379
43
349
00
Total Debt
312
40
31.31
%
3451
2
36.18
%
3618
6 5044
119
28
106
51
The analysis reveals the positive performance of Medtronic as it pertains to the income
statement and related ratios from 2015 to 2016. The balance sheet improvements were
evident in 2015 reflecting the improvements from the 2014 to 2016 balance sheets.
Their capital allocation remained constant. With the increased interest rates from 2013 to
2016, the WACC was calculated at 7.07%.

Medtronic Inc. Merger With Covidien: FINC 5880 Final Paper
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Covidien added $10B in revenue, $1.6B in cash, and $20.7B in equity while providing new
sources of revenue to untapped geographic areas. This allowed Medtronic to tap new markets
with legacy product or services from companies.
Return on Equity, or otherwise know as the Dupont Model, improved 65% year over year,
while return on assets improved by 73%. These are both indications of efficiencies and
profitability.
Both current and quick ratios declined, which is in line with management’s position of
deploying the cash towards research and purchases of other revenues. The trade asset ratios
of working capital, receivable and payables turnovers all decline between 20% to 25%. This
is also an indication of better capital management. The DSO decreased by 23.54% to 70.41
days while the payables outstanding decreased by 26.75% to 68.23 days. The collection days
still needs to be decreased which will improve the ratios further and have less stress on the
cash position.
All three debt ratios improved in the low single digits, however, the interest coverage
decreased significantly. The debt has increased faster than the income. As they penetrate new
markets, this will also improve.
Revenues have increased from 2013 at $16.59B to 2016 $28B with Covidien adding $10B
per year from 2015 to 2016, however it is important to note that Covidien was not the only
acquisition during that time period. As a percentage of sales, the income statement has
deteriorated since 2013, which may be a direct result of the Affordable Care Act’s taxes and
regulations as well as increased competition. This supports the desire for the management of
Medtronic to seek out Covidien for an inversion.
When compared to Merck, a similar company, Medtronic’s gross profit margin was better,
however, the SGA expenses were significantly higher. The net profit for Medtronic was
higher as a result of other income disparity of approximately 14%.
Recommendation and Conclusion:
Facing a hostile environment with changing regulations and aggressive consolidation by
competitors, Medtronic made the correct decision to deploy its large liquidity position to
purchase multiple companies, some large like Covidien and some small like Diabetek, for
rapid growth and reach. The inversion was the correct decision at the time to reduce the tax
consequences concurrently with the extended reach, however, that has proven to be incorrect

Medtronic Inc. Merger With Covidien: FINC 5880 Final Paper
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in hind sight. The merger with Covidien certainly reversed the erosion that Medtronic was
experiencing from 2013 while giving it new excitement. Improvements in the financials were
crucial and put it close to the same performance as Merck. There seemed to be more room for
improvement in the trade asset days outstanding, SG&A, and higher net income. This was to
be expected as the company continued to assess and improve the efficiencies to be gained by
the fourth largest merger announcement of 2014 and any in the medical field at the time.
Products and services from both companies were to be sold to the other’s client base thus
potentially increasing the revenues significantly.
I do not hesitate to recommend this company as best in class or highest potential for a strong
return on investment. No doubt that there will be improvements, however, in this case past
performance may be indicative of future results. The management is not that good at organic
growth. They hoarded cash as the erosion of the company continued. They could not increase
sales organically and had to make multiple purchases with the mind set that their potentially
better performing stock price will have a lower cost of capital than the target companies and
thus making all purchases profitable. Consolidation was happening and necessary, therefore
they had to make a purchase. The net result of 1+1 is 2, however in this case when you add
the net income from Covidien in 2014 and the net income of Medtronic in April 2015, the
result by 2016 should have been $3.1B net income, but there was a surprising upside to $3.5B
with more room for improvement. Although the performance is below Merck’s, it should be
noted that Merck also had $10B more revenue with the GPM potentially making it to the net.
Considering that did not happen, it is safe to state that Medtronic outperformed Merck.
Since 2016, the stock price of Medtronic has increased from $74.75 to a current price of $92
for an increase of 23%. The performance should have been better.

Medtronic Inc. Merger With Covidien: FINC 5880 Final Paper
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References:
Burrows, Dan, Dec 22, 2014, “10 Biggest Mergers and Acquisitions of 2014”, Investor Place,
https://investorplace.com/2014/12/mergers-and-acquisitions-biggest-deals-2014/
No Author, No Date, “Medtronic Inc.”, Annualreports.com,
http://www.annualreports.com/Company/medtronic-inc
Trefis Team, June 16, 2014, “Medtronic's $43 Billion Covidien Buyout Is More Than Just A
Tax Saving Deal”, Forbes,
https://www.forbes.com/sites/greatspeculations/2014/06/16/medtronics-43-billion-covidien-
buyout-is-more-than-just-a-tax-saving-deal/
Collins, Sarah, April 1, 2016, “Why Medtronic Is Diversifying beyond Medical Devices”,
Market Realist, https://marketrealist.com/2016/04/medtronic-diversify-beyond-medical-
devices/?utm_source=yahoo&utm_medium=feed&utm_content=read-prev-
a&utm_campaign=analyzing-medtronics-acquisition-covidien
Pederson, Amanda, Sept 8, 2017, “Is Medtronic Making Good on Its Post-Merger Promise?”,
Medical Device and Diagnostic Industry, https://www.mddionline.com/medtronic-making-
good-its-post-merger-promise
Perrielo, Brad, Spet 4, 2018, “Medtronic can’t shake shareholder suit over Covidien merger”,
Mass Device, https://www.massdevice.com/medtronic-cant-shake-shareholder-suit-over-
covidien-merger/
No Author, No Date, “Medical Equipment & Supplies Industry Financial Strength
Information”, CSI Market,
https://csimarket.com/Industry/industry_Financial_Strength_Ratios.php?ind=804&hist=12
and https://csimarket.com/stocks/income.php?code=COV