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Ahead of Bell: Medtronic, Covidien

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NEW YORK (AP) — Shares of medical device makers Medtronic and Covidien jumped in premarket trading Monday as investors welcomed news that Medtronic has agreed to buy its Ireland-based rival in a $42.9 billion cash-and-stock deal.

On Sunday the companies announced that Medtronic Inc. will pay $93.22 per Covidien PLC share, a 29 percent premium to the company's Friday closing stock price of $72.02.

The deal is the latest in a series of acquisitions by medical-device manufacturers. The companies are seeking to expand their offerings and contain costs in response to price curbs forced by the nation's new health care law.

The combined company would have its executive offices in Dublin, where it could benefit from Ireland's lower corporate tax rates. But the merged company would continue to operate in Minneapolis, where Medtronic employs more than 8,000, the companies said in a statement.

Matthew Dodds of Citi Investment Research said that the biggest risk to the deal may be political. Efforts by domestic companies to use mergers to reincorporate overseas for tax reasons have raised concern among some U.S. lawmakers. Dodds said in a client note that the transactions have become a "hot button" for the government, and that they may eye the Medtronic-Covidien transaction because it has now become the biggest agreed-upon deal with such tax implications. Still, Dodds said that he has to believe that Medtronic and Covidien thoroughly vetted such a risk.

The analyst said that the transaction strengthens Medtronic's position in the medical device sector, as Covidien has a leadership position in patient monitoring and respiratory as well as a duopoly position in general surgery. This may put some pressure on other major medical device companies to consider "bulking up," Dodds said.

Echoing a similar sentiment, Jefferies' Raj Denhoy said the transaction is justified in part because there's nearly no product overlap between the two companies and it creates a business that is better aligned to the evolving health care world. For a financial standpoint, the deal provides potential tax savings and other cost savings, he added.

Medtronic's stock gained $7.19, or 11.9 percent, to $67.89 before the market open, while shares of Covidien soared $25.98, or 36 percent, to $98.

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