Incorporated: 2007
NAIC: 339113 Surgical Appliance and Supplies Manufacturing
SIC: 3842 Surgical Appliances & Supplies
Covidien Ltd. is the former Tyco Healthcare unit, spun off in 2007 from its corporate parent, Tyco International Ltd., a conglomerate made infamous by the deeds of its chief executive officer, Dennis Kozlowski. In addition to being free of the stigma attached to the Tyco name, Covidien as an independent company has been able to grow its healthcare products business after years of neglect under the Kozlowski regime. The company is involved in five business areas: medical supplies, medical devices, pharmaceutical products, imaging solutions, and retail products. All told, Covidien offers about 7,000 brands, the most significant including Autosuture, Kendall, Mallinckrodt, Nellcor, Puritan Bennett, Syneture, US Surgical, and Valleylab. Listed on the New York Stock Exchange and the Bermuda Stock Exchange, Covidien maintains its corporate headquarters in Bermuda for tax purposes and its U.S. administrative offices in Mansfield, Massachusetts. The company also maintains 65 manufacturing plants in 16 countries and sales operations in more than 50 countries.
Formation of Tyco: 1962
Tyco International started out as a high-tech company in 1962, founded by Harvard Ph.D. Arthur J. Rosenburg, who two years earlier had opened a laboratory in Waltham, Massachusetts, to conduct government research. Among its more notable successes, the company developed a silicon carbide laser, microcircuitry technology, and fuel cell catalysts. After taking Tyco public in 1964, Rosenburg launched an acquisition spree, mostly adding high-tech companies. Although he grew sales from less than $1 million in 1963 to more than $41 million by the end of the decade, it was not a particularly successful strategy, the price of Tyco stock plummeted, and in 1970 Rosenburg was removed by the company's board.
Under the leadership of Joseph P. Gaziano, Tyco rebounded in the 1970s, achieving diversity while completing even larger acquisitions. Gaziano's goal was to turn Tyco into a $1 billion company by 1985. He would not have the opportunity to fully embrace that challenge, however. He died unexpectedly in 1982 at the age of 47. His successor, John F. Fort, sold many of the assets accumulated by Gaziano to focus on three core units: fire protection and plumbing, electronics, and packaging. The company reached the coveted $1 billion mark in 1987, but earnings were crippled by the recession of the early 1990s, and in 1992 Fort was replaced by a new CEO, L. Dennis Kozlowski.
Establishment of Tyco Healthcare: 1994
Kozlowski was more aggressive than Fort and possessed more global aspirations, prompting a name change in 1993, from Tyco Laboratories to Tyco International. A year later he took Tyco into the healthcare field through the packaging division, which soon became a disposable and specialty products division, renamed Tyco Healthcare. The most important acquisition in this field, and Kozlowski's first major deal after taking charge, was the $1.4 billion purchase of Kendall International, a company that was generating about $800 million in annual sales manufacturing and distributing a wide variety of disposable medical supplies, including bandaging, wound care dressings, and elastic support and other vascular therapy compression products. Also in 1994, Tyco added three other disposable medical supply companies: Classic Medical, Uni-Patch, and Promeon.
In the second half of the 1990s, Tyco Healthcare expanded further through acquisition. Bought in 1996 was Professional Medical Products, Inc., another manufacturer of disposable medical supplies. These included adult incontinence products, a line that was bolstered a year later by the purchase of another company, Medical Disposable. In 1998 Kozlowski completed an acquisition even larger than Kendall, paying $1.77 billion to American Home Products for its Sherwood-Davis & Geck subsidiary. Sherwood-Davis had about $1 billion in sales, offering a variety of disposable medical products, including catheters, feeding tubes, and surgical sutures. Yet this deal as well was dwarfed by an acquisition completed later in 1998. In October of that year Kozlowski used $3.17 billion in Tyco stock to add United States Surgical Corporation, another disposable medical supply company, offering sutures, staples, and surgical products used in minimally invasive procedures. Also, in 1999, the Kendall unit expanded through acquisition, adding the Oral Care division of ICP Medical, which supplied the hospital market with a mouthwash, toothpaste, and a gel that acted as a saliva substitute for patients suffering from dry mouth as a result of radiation or chemotherapy treatments.
Kozlowski, nicknamed "Deal-a-Day Dennis," was making major acquisitions in other areas as well, and by the end of the 1990s the method by which Tyco accounted for them caught the attention of the Securities and Exchange Commission (SEC). According to the Financial Times, Tyco was criticized for using "loose rules governing how companies can take charges against profits for mergers to inflate acquisition costs at the time of the deal. This would later help to boost earnings." Although the SEC initiated an inquiry in 1999, no action was taken and Kozlowski continued his deal-making in the new century. In 2000 Tyco Healthcare was the recipient of a pair of major acquisitions. One was General Surgical Innovations, manufacturer of the Spacemaker balloon dissection devices used in minimally invasive surgery. The other was the $4.2 billion stock purchase of Mallinckrodt Inc., the addition of which simultaneously built on and expanded Tyco Healthcare's platform. Generating some $2.6 billion in annual sales, Mallinckrodt added respiratory care products for oxygen monitoring and critical care ventilation, medical imaging, blood-analysis products, and bulk pharmaceuticals. Mallinckrodt held one of only two licenses for the importation of opium into the country and also supplied codeine salts. The acquisition was also significant because it signaled to the investment community that Tyco's problems with the SEC had been resolved. In fact, it was a calm preceding a serious storm.
Kozlowski continued to make acquisitions for a time, although one of them involving Tyco Healthcare failed to pan out. In May 2001 Tyco announced an agreement to pay $3.1 billion for C.R. Bard Inc., a multinational medical products supplier of vascular, urology, oncology, and surgical specialty products. The deal unraveled in early 2002, however. By this time corporate scandals, headlined by Enron, were making investors wary and regulators inquisitive, and under a cloud of doubt Tyco began to see its stock price tumble. Kozlowski announced a surprising new strategy in late January 2002, shelving acquisitions in order to pursue a plan to split Tyco into four separate publicly traded companies and selling the plastics unit in order to increase shareholder value. One of those spinoffs was slated to be Tyco Healthcare. When this idea failed to encourage Wall Street, he changed tack again just three months later, this time maintaining that only the financial services group would be spun off. Investors were no more reassured than before, and the stock continued to fall. Then, in June 2002, Kozlowski resigned and a day later was indicted for failing to pay $1 million in New York sales tax on artwork. Three months later, Kozlowski's legal problems grew far worse. He and Tyco Chief Financial Officer Mark H. Swartz were indicted on multiple counts of grand larceny, enterprise corruption, and securities fraud, accused of pocketing more than $170 million of Tyco's money and another $430 million in illegal stock sales.
While Kozlowski was on his way to trial and ultimately to prison, his successor Edward D. Breen began a thorough house cleaning at Tyco, removing a number of top executives, instituting tighter accounting procedures, and shedding scores of poor-performing noncore businesses. At the same time, he was willing to invest in units such as Tyco Healthcare that had been neglected under Kozlowski's watch. Although he grew the business through acquisition, he failed to invest the necessary funds in research and development programs that could produce new higher-margin products and expand market share. Nevertheless, Breen was willing to spend money on an acquisition when the right deal came along. In 2002 Tyco Healthcare added Paragon Trade Brands, Inc., maker of absorbent personal care products and infant disposable diapers. The Valleylab division in 2005 acquired Vivant Medical Inc., which developed microwave ablation medical technology, and in that same year Tyco Healthcare's surgical business was enhanced when a controlling interest was acquired in Floreane Medical Implants, S.A., a French manufacturer of implants designed for general surgery, and urological and gynecological surgeries. In 2006 the U.S. Surgical unit acquired Confluent Surgical, Inc., which produced sprayable surgical sealants and anti-adhesion products. Also in that year Tyco Healthcare took a majority stake in another French firm, Airox, S.A., supplier of home respiratory ventilation systems.
In 2006 Kozlowski's former plan to split up Tyco was dusted off and revised. In January of that year Tyco's board of directors announced a plan to divide the company into three publicly traded companies: Tyco Electronics; a new company combining Tyco Fire Security and Engineered Products & Services; and Tyco Healthcare. Tyco shareholders were to receive stock in the three companies, which would operate independently, electing their own boards and adopting their own corporate governance standards. Not everyone was pleased with the proposal, however. Several institutional investors, including the Louisiana State Employees' Retirement System and Voyageur Asset Management, filed a lawsuit questioning the plan, calling it a maneuver to shield assets. The same investors had also sued Tyco over its accounting, maintaining that from December 1999 to June 2002 Tyco had overstated its income by more than $5.8 billion.
Despite the litigation, the breakup at Tyco proceeded. The healthcare unit, by this time, was doing about $10 billion in sales a year. It was headed by chief executive officer Richard J. Meelia, who had come to Tyco from Kendall. After holding a variety of sales and marketing positions at American Hospital Supply Corporation, Meelia had joined Kendall, where in 1991 he became group vice-president. Following Tyco's acquisition of Kendall, he was named president of the new Tyco Healthcare unit in 1995. One of his major priorities in preparing Tyco Healthcare for independence was the coining of a new company name and brand. Trademark searches were conducted in more than 90 countries and 30 languages to find a name suitable for a global marketplace. In February 2007 the company announced that it planned to rename itself Covidien. Meelia explained in a statement, "Covidien is an expression of our role as a leader in the healthcare industry and marks the start of an exciting new chapter for us."
New Name for the Future
That new chapter would be free of any negative associations that may have been associated with the Tyco name, although in truth the unit did not appear to have suffered any negative consequences operating as Tyco Healthcare. According to Modern Healthcare, "Covidien doesn't actually mean anything--it was computer-generated and chosen after a nearly nine-month-long process that included a worldwide evaluation to ensure the name wouldn't unintentionally offend any potential customers." Selected over 6,000 other candidates, it was meant "to suggest a feeling of togetherness and collaboration (as in the prefix 'co-') along with a sense of life and renewal (based on vida, the Latin word for life)."
Even before the breakup was completed in June 2007, Covidien began a branding effort to introduce the Covidien name. Company spokesperson Eric Kraus explained that as a division of a conglomerate, Tyco Healthcare had been content to allow its myriad slate of companies, many of which had been in business for a long time, to keep their own identities: "People were aligned with the brands and those companies. For us to be successful, we're going to have to have everybody aligned behind Covidien." Shortly after the spinoff was completed, Covidien stock began trading on the New York Stock Exchange and the Bermuda Stock Exchange with a valuation of about $20 billion. While investing heavily in research and development to grow its core businesses, primarily surgical instruments, Covidien indicated that it was willing to pursue acquisitions in the $60 million to $250 million range in order to beef up its other offerings. After the first six weeks of trading, Covidien's stock had dropped about 8.5 percent, but the company appeared to have a promising future, well able to fund a growth strategy and pay down debt through strong cash flow.
Principal Subsidiaries
Kendall International; United States Surgical Corporation; Mallinckrodt Inc.
Principal Competitors
Becton Dickinson and Company; C.R. Bard, Inc.; Johnson & Johnson.
Further Reading
Davoud, Salamander, "Covidien Debut Marks Tyco's Rehabilitation," Financial Times, July 2, 2007, p. 24.
Ford, Omar, "Tyco Healthcare, Now Covidien, Spun Off from Tyco International," Medical Device Week, July 6, 2007.
Heuser, Stephen, "Covidien's Birth Poses Name-Recognition Challenge," Boston Globe, June 29, 2007.
Richardson, Karen, "Recent Spinoffs That Flew Badly May Rise Again," Wall Street Journal, August 24, 2007, p. C1.
Romano, Michael, "The Naming Game," Modern Healthcare, February 26, 2007, p. 46.
Simon, Ellen, "Tyco Health-Care Unit Doubling R&D Spending," Newark (N.J.) Star-Ledger, January 21, 2004.
"Tyco to Split into Three Companies," Contractor, February 2006, p. 7.
— Ed Dinger
