From personal experience this totally tracks. The integration office at MDT had hundreds of millions of "guaranteed" synergies and cost savings, they claimed more than they even promised the street. They realized almost none of it. This is Geoffs legacy.
From Linkedin:
"In Jan 2015
hashtag#Medtronic completed its acquisition of
hashtag#Covidien for $43B. The acquisition received a lot of media attention as it was the biggest MedTech acquisition ever. At the time Medtronic had 50,000 employees and Covidien had 40,000 employees, which made the
hashtag#acquisition more like a
hashtag#merger. The acquisition brought with itself a lot of cultural challenges, but for the purpose of this post, I will focus mainly on its impact on the economics of Medtronic.
Impact on Revenue
Prior to the acquisition, in years 2013, Covidien reported $10.2B and Medtronic reported $16.6B in annual
hashtag#revenue. Following the acquisition Medtronic’s revenue almost doubled, reaching $29B in 2016, making it the world’s largest medical device company by revenue. However, beyond the initial increase, its revenue remained mostly the same.
Impact on Earnings
Many saw the acquisition dilutive as Medtronic had much better
hashtag#margins compared to Covidien (i.e. 25% Profit Margin vs 15%). In year 2013, Covidien reported $1.6B and Medtronic reported $3.5B in
hashtag#earnings. The expectations were that following the merger Medtronic’s earning would go well above $5B especially given that leadership spoke a lot about creating synergy between the two entities. However, following the acquisition, despite Medtronic’s revenue doubling, its earnings remained flat. In other words, the company traded profit margin for higher revenue.
Tax Play
Tax played a big role in this acquisition. Medtronic, which was an American company, used this acquisition as an opportunity to relocate its legal location to Ireland to reduce its tax rate. The move received a lot of criticism, including some from existing shareholders and employees that were forced to pay capital gain. But in the end, it should have allowed Medtronic to pay less income tax and increase its earnings even further. Something that did not happen, as Medtronic only managed to keep its original earnings and Covidien earnings were mostly lost in the process.
Impact on Market Cap
There is always a very high correlation between company earnings and its valuation/market cap. This is mainly because
hashtag#valuation is done by looking at a company’s potential future earnings. Following the acquisition Medtronic market cap started to rise as it signaled that it would generate higher earnings in coming years. By 2021 Medtronic’s market cap reached $180B. But as the time went by it became clear that higher earnings are not going to materialize. Consequently, its market cap started to decline. Today, Medtronic’s market cap is close to what it was prior to the acquisition i.e. $100B.
It will be interesting to see if Medtronic can turn this around in coming years, perhaps by focusing on restoring its margins. Another potential strategy for the company could be to spin off parts of its business to improve its overall economics."
