Covidien Shuffles The Deck

Medical technology companies, particularly the larger ones, tend to be quite acquisitive. So, another sign that normalcy may be returning to the economy and the market is when acquisitions start to tick up again. The good news is, this appears to be happening now. In the wake of the Medtronic (NYSE:MDT) and ATS Medical deal a little while ago, Tuesday saw the announcement of a larger deal between Covidien (NYSE:COV) and ev3 (Nasdaq:EVVV).

Tutorial: The Basics of Mergers and Acquisitions

The Deal
Under the terms of the deal, Covidien will pay $22.50 per share in cash, for a total consideration of $2.6 billion, for all of ev3's shares. As part of the deal, Covidien announced that the company expects to incur a little bit of dilution in fiscal 2010, to the tune of five to eight cents per share out of the current estimate of $3.40. For fiscal 2011, the dilution will be about 10 to 15 cents, versus the current average estimate of $3.76

What Is Covidien Getting for $2.6 Billion?
ev3 is a company that has specialized in acquiring and developing therapies for peripheral vascular and neurovascular treatments. Built largely by acquisitions itself, ev3 sells products like peripheral stents, mechanical atherectomy systems, peripheral balloons, embolic protection devices, liquid embolics and embolization coils - the last two of which are being used to treated cerebral aneurysms in a far less invasive way. (For more, see The Wacky World Of M&As)

In the past, I have felt that ev3's operating philosophy was to buy poorly-run small companies that had good technology and essentially try to rescue them from the scrap heap. I realize that is not a very charitable assessment of the company, but if you look at a long-term chart of ev3, you do not see a very impressive track record. After all, if you wish to give company management credit for the big rise from below $4 over the last 18 months, it also has to take the blame for the drop that took it below $4 in the first place.

For Covidien, this deal represents a big move into a very promising market. Both neurovascular and peripheral intervention are growing markets that are still largely under-treated. Better still, from the perspective of Covidien, there really is not a lot of entrenched or dominant competition, although companies like Bard (NYSE:BCR) and Cook have footholds in the peripheral space, and there are smaller rivals like Spectranetics (Nasdaq:SPNC) and Cardiovascular Systems (Nasdaq:CSII) as well. In the neurovascular space, competitors include Boston Scientific (NYSE:BSX), Medtronic and Micrus Endovascaular (Nasdaq:MEND).

While Covidien did not directly connect the dots, I do not think it is a coincidence that the company also announced that it is selling off a chunk of its respiratory business. Covidien did not provide details in the press release, other than to say the company is selling its CPAP and bi-level products to a private company based in Luxembourg. While these sleep apnea treatments have been relatively lucrative for the industry for a number of years, they do not have nearly the growth potential of businesses like peripheral or neurovascular intervention. (For more, see The Basics Of Acquisitions.)

All in all, this strikes me as a reasonable deal, and one where ev3 shareholders are getting a pretty good valuation for their shares. I also happen to think that it is a win-win transaction - ev3 management had its chance, and I do believe Covidien might be able to do more with the assets through a combination of better management and more expansive marketing support.

More Normal Means More Deals
As I said in the opening, I regard this as another sign of increasing normalcy in the med-tech world. As hospitals spend a little more freely, large companies gain access to credit, and smaller companies sense that market valuations are more reasonable than they were a year ago, the environment is certainly more conducive for deals. Investors should stay tuned, but should not count on these deals; although it may be fine to say that companies like Micrus and Cardiovascular Systems are destined to be acquired some day as well, figuring out when is always the tricky part. (For more, see A Checklist For Successful Medical Technology Investment.)