Argyle Conversations
by Argyle Executive ForumSM
Argyle Conversation: Roth Kehoe,
M&A Partner at Hunton &
Williams, interviewed Geoffrey
Martha, SVP Corporate Strategy
& Business Development at
Medtronic, regarding the
healthcare company’s approach
to business development,
integration, global expansion,
and divestitures
Argyle Conversations
February 22, 2012
Page 2
Argyle Conversation: Roth Kehoe, M&A Partner at Hunton &
Williams, interviewed Geoffrey Martha, SVP Corporate Strategy
& Business Development at Medtronic, regarding the
healthcare company’s approach to business development,
integration, global expansion, and divestitures
by AEF - Wednesday, February 22, 2012
http://www.argylejournal.com/functions/corporate-development-strategy/argyle-conversation-rot
h-kehoe-ma-partner-at-hunton-williams-interviewed-geoffrey-martha-svp-corporate-strategy-busin
ess-development-at-medtronic-regarding-the-healthcare-company%e2%80%99s-a/
ROTH KEHOE: Geoff, will you give us an overview of your background and current role at Medtronic?
GEOFFREY MARTHA: I’m relatively new to Medtronic. I started roughly five months ago, and prior to that, I was
at GE for 20 years. Of that time, I spent 15 years with GE Capital and the final 5 years with GE Healthcare in
various roles. I worked in mergers and acquisitions, strategy, and operational roles. I always ended up back in GE
business development, which is not corporate development, but an M&A role with a heavy dose of strategy. During
those last few years at GE Healthcare, I was responsible for mergers and acquisitions for GE Healthcare. Now at
Medtronic, I’m still responsible for M&A, which includes buying companies, divestitures, and integration planning
and tracking. We also have a healthy minority investment, including venture investing and finding strategic
companies that fit with Medtronic. In addition, I’m responsible for corporate strategy in terms of how we’re
organized, the different operating mechanisms, capital allocation, and other such items outside the purview of a
business unit leader. Finally, I oversee enterprise-wide initiatives, such as growth initiatives and any other
initiatives assigned by our CEO, Omar Ishrak.
You mentioned oversight of integration, which is challenging for many companies. How does
Medtronic approach integration throughout the M&A process?
I’ll break it down into three distinct areas. There’s integration planning, the actual integration itself, and then
tracking and course correction. Integration planning actually starts the minute you start thinking about the deal.
Integration planning is within the visible organization, so it’s a fluid exchange of timely information about the
status of the deal. To do this well, someone is involved in the deal process from the beginning who is thinking
differently. The M&A or business development person is thinking about how to get the deal done. The integration
person is thinking about what happens if we get this deal done. How will we integrate it? How are we going to
manage it? It creates a bit of healthy conflict at times, but we aren’t measured solely on the number of deals we
do. We must take into consideration the model, financial targets, rate of return on a risk-adjusted basis, and so on.
All deals may seem strategic at first, but the question becomes whether they will be the right strategic move over
the long haul. That’s how we get measured, and that’s why we’ve made this investment.
I’m a big believer in the integration phase. Once the deal is done, the integration person will often stick with the
deal through the due diligence phase because they have so much knowledge. When the deal gets through due
diligence, it’s a milestone, and then we would have a designated integration leader separate from the planning
resource. The integration leader would be selected by the business unit that is the catcher of the deal. If there is
no business unit, it’s like white space, and the integration leader would report to someone on the staff of the CEO,
which we call the executive committee at Medtronic. However, nine times out of ten, it’s an existing business unit
within Medtronic that will be the catcher of the deal, and that business unit will hire and fund an integration team.
The business unit owns integration, but my team owns integration planning. It’s very collaborative. Depending on
the dynamics of the deal, we also place the integration planning person on the integration team for at least six
months. The other piece that we do is integration tracking, which is obviously running parallel to the actual
integration.
It’s a healthy, constructive dynamic here. Because we put together the deal economics and model, my team is
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tracking it to make sure the value drivers of the deal are consistent and don’t get changed over time, unless we’re
proactively making that change. The business unit owns the integration. Together, we have a monthly scorecard
and quarterly deep dives as part of the tracking process. We track them for five years. Annually, we update our
board of directors about how the deals are doing, measured by the parameters I mentioned earlier.
How does the geographic element factor into Medtronic’s expansion activities? Are there global
opportunities, and what are the areas of focus?
Our CEO, Omar Ishrak, has been very vocal since coming on board that one of his key themes is globalization.
When you examine his comments, he is specifically focused on emerging markets. Today, about 10 percent of
Medtronic’s revenue comes from emerging markets. Our goal is to increase that amount to 20 percent by 2015.
Doing the math, that is pretty aggressive growth. Historically, we’ve grown by 20 percent overall in emerging
markets, but we’re definitely hoping to accelerate it. We will need to grow by more than that to achieve the goal of
20 percent of revenue coming from emerging markets by 2015.
All of that growth won’t be from acquisitions. In China, we currently have a decent-sized business today, roughly
600 million U.S. dollars of revenue. We’re going to make a combination of organic and inorganic investments to
build on that and accelerate growth. Looking at emerging markets, we segment the market as premium, value,
and then underserved. Think of it as a triangle with the top being the premium, the middle is the value, and the
bottom is the underserved. Medtronic, along with many of our competitors in the med-tech space, compete today
in emerging markets in that premium space. For example, we’re exclusively serving the relatively high end of
China’s healthcare. Over the next three to five years, most of our growth will come from that premium segment.
However, in the longer term over the next five years, we want to go after the value segment. That’s where at least
75 percent of the population is located, and there’s a portion of the underserved as well. There’s a large piece in
that value segment we’re trying to target. However, we also still have a lot of runway left in the premium
segment.
These are emerging markets. If we just get our penetration to the level of where it is in developed markets, it’s a
$5 billion per year revenue opportunity for Medtronic. That’s just getting the premium segment, and the value
segment would be on top of that. However, the value segment will take some disruptive technologies and
disruptive healthcare delivery models in order to get the cost point down to an affordable level because there are
several barriers. We’re trying to understand the market potential and the barriers to market adoption on a therapy
and country specific basis. We need to understand those barriers and have specific, granular plans to address
them. Cost is a big barrier as well as infrastructure. Is there enough imaging equipment to enable some of the
therapies we provide? Do they have enough surge to perform certain cardiac procedures? There are many barriers,
so we must think outside of the box, not just about providing the therapy but about providing solutions in a cost
effective way to service the value market. This is a huge initiative for our CEO, and I believe it’s one of the reasons
he was hired. He was also previously at GE Healthcare and ran a big part of that business for a long time. He was
known for driving the global organization and process innovation.
Regarding the growth plan, is it more product-driven or distribution-driven?
It’s more product-driven. Part of our strategy is localization in all emerging markets, including locally-designed
products for the local market plus local manufacturing and local distribution. Today in China, we’ve got the local
distribution, but we’re still importing a lot of our product. The local manufacturing is not enough. However, local
manufacturing will help in a country like China because the government is heavily supporting local products from a
reimbursement perspective. There are heavy incentives to be local, but to be successful, we believe those products
also need to be designed in that country for that country instead of taking sophisticated U.S. products, disfeaturing
them, and selling them.
In a place like China, it’s a race because the infrastructure there enables local companies. The local companies are
strong, and they’re going to take that value market, own it, and possibly make us unable to play. For example,
look at stents, which are relatively simple. It’s ubiquitous therapy that you see all over the world. In 2003,
multinational companies such as Medtronic, Boston Scientific, and Abbott owned 100 percent of the stent
market—the premium market—in China. There are three or four big, local stent manufacturers that are growing fast,
and we’re losing share. Unless we get there, act like them in terms of being local, and set up local management
teams and engineers, we’re not going to be successful. We view emerging markets as a must win, particularly
China and India. If you don’t win in those markets, you won’t be a successful med-tech company in 10 years.
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That’s our view. Our formula is to be local, and it’s an important strategic imperative.
When we’re evaluating investments, we’re definitely creating models that consider and add the terms of risk.
We’re looking at it differently. Traditionally, we might accept the risk of the high end products we’re developing
where there are a lot of technical risks and clinical risks. But when we look at a country like China with all these
impediments, we may not be comfortable with that same level of risk. We have totally changed our risk models
because the bigger risk is not doing it. It’s a big culture change that our CEO is driving across the company.
What type of payer models do you see in these emerging markets? Is there a need to develop more
third-party payers?
The thing about emerging markets is that emerging doesn’t mean simple. They are very complex and different. For
example, in China, the difference is the government investments. In China’s healthcare reform, the government is
investing a significant amount of money in infrastructure and reimbursement. Over 90 percent of both the rural
and urban population will be covered by some form of healthcare insurance. That’s an example of a country with a
lot of insurance and government pay, and it’s increasing. Also in China, with the rise of the middle class, they can
afford private pay along with the affluent. There will be a healthy private pay market, but there’s a robust
government pay market as well. We need to have solutions that target both, but the premium market will rely
more on private pay while the value market will rely much more on insurance.
Regarding the development of third-party payers, I don’t think there is a need in China. In the short term, I like
China because it will move faster due to government pay. By contrast, India has much less government pay, and
it’s over 90 percent private pay. When I talked to some Indian government health officials, they told me the
percentage of insurers was maybe only three to five percent. It’s very small, so what you find in India is a super
entrepreneurial spirit around healthcare and healthcare delivery. When I come home from India, my head is
spinning on the plane from all the business plans in the air, and it’s very creative. However, for a company like
Medtronic, we may have to get more involved in partnering with the healthcare providers. We must have a
disruptive cost innovation on the products themselves but also on the delivery models. The affordability is way
lower than anywhere else. For example, it’s lower than China because there is much less government pay, and the
middle class isn’t nearly as affluent as in China. There just isn’t as much growth in India. On top of that, there is
high inflation there right now. India will have a longer term than China in terms of growth in the healthcare space.
You can see that by the number of companies. In China, there are big, local med-tech companies, but in India,
there aren’t very many at all.
Medtronic has completed some unique transactions, such as the equity bridges to acquisitions. Will
you tell us how those deals came about and whether they were originally designed as investments or
acquisitions?
Historically, Medtronic has been on the leading edge of med-tech, driven by high technology with lots of clinical
value. In this market, there are a couple of core technologies, and the barriers are how you get in. People are
innovating all around the world, in Israel, China, India, and so on. It’s unbelievable. You can’t invent everything
yourself, so you must rely on some of these start-up companies. It’s very hard to distinguish which are going to be
the winning ones, though. Medtronic has used a formula for over a decade that includes investing in start-ups,
healthy venture investing, and having a strong relationship with the world’s leading venture capitalists. We partner
with them and develop a relationship to identify and invest in start-ups in areas that are core markets for us, or
adjacent markets we’re considering. We provide some capital and board observers, some of which may already be
positioned. In some cases, we provide technology sharing or distribution to help the company. We help them with
knowledge, such as how to set up a clinical trial. Many start-ups don’t know how to do that, but it’s one of
Medtronic’s core competencies. With this approach, our overall returns have been significantly higher than venture
healthcare returns, looking at industry standards.
We’re in a good position to identify investments. There is still risk and we have losers, but the winners outweigh
the losers from a financial perspective. However, that’s not why we’re doing it. The idea is not to lose money, but
the main strategic goal is a different success. An example of success is when one of those investments ends up as
an acquisition. Sometimes it’s an accident, but other times, it’s very purposeful. Salient Surgical Technologies is an
example of this. Ten or twelve years ago, it was a technology that started at Medtronic. The company believed
they needed to do more of it, but it just didn’t make the cut for funding. This technology wasn’t a priority, so
Medtronic spun it out, invested some seed money, and obtained other investors. This was done to develop the
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technology into a commercialized product. It’s been approved and reimbursed in multiple countries. It was funded
appropriately, and they hired a focus management team. Originally, Medtronic was solely looking to spin out the
technology. It wasn’t originally a strategic move, but it became strategic. Later, we were so close to the company,
so we were in a good position to buy it. It was a definite advantage to us. It helped us because the private equity
minority owners trusted us and had been working alongside us. Economically, it certainly differentiated us in the
process.
That example was more of an accident than Ardian, a recent acquisition. It’s a drug resistance hypertension
innovation, a technology identified in our strategic roadmap early on. It’s not something we had or were in a
position to develop. We identified the company, made an equity investment, liked what we saw over time, and
made additional equity investments. We built a fairly big equity position there. As time passed, it became clear to
us that this was a company we wanted to own. So, we picked up as much as we could and got as close to the
company as possible. It was very expensive since it was pre-revenue with a lot of confidence. It’s now been
launched and we’ve bought it. We have watched it in a few countries, not yet in the United States, but we feel
very good about it.
We wouldn’t have had the confidence to make that bet had we been unaware of what a good investment gets
you. It gets you close to the company, either on the board or a board observer. It definitely mitigates some risk to
target technologies and bolster R&D in this manner. If you can develop this type of technology internally, that is
usually the more cost efficient pathway. But healthcare is very nuanced and technology-based. You can’t invent
everything yourself.
Is Medtronic planning to dispose of any non-core assets? What is your strategy on that front?
It starts with capital allocation. We generate roughly $4 billion to $5 billion of cash each year. That cash is
extremely valuable, and we know there are several sources competing for cash, including organic investments,
inorganic investments, and our shareholders. We must be ruthless about portfolio management, always looking at
our portfolio and asking whether it’s a good market for us, particularly with businesses. Can we win? Ultimately,
are we the best owner for this business? Recently, we have become more disciplined about our screening process
in terms of identifying specific people to run this process and set up operating mechanisms. There are simple
screens we consistently use across the company to ask those questions. If some of the answers don’t come back
the way we historically have seen, they hit a trigger and get on a list for evaluation. I would argue that big
companies aren’t very good at this because the incentives for many of the executives, business unit presidents for
example, are based on growth. Theoretically, this process takes away from growth. We think it’s a best practice to
have a third party that is more data driven and systematic about the process by implementing logical screens and
conducting the analysis on a regular basis. It’s easier said than done, but it’s an area where we’ve made more of
an investment this year.
Recently, one of those units that hit a trigger was our Physio-Control Unit. It’s the first deal we’ve announced over
the last eighteen months where we’re spinning it out. It’s a good business that’s growing and profitable. There are
many people at Medtronic who wanted to keep it. However, the executive committee of the company believed it
doesn’t fit squarely and we aren’t the best owner for this business. We’re making tough capital allocation
decisions, and it was clear that the Physio unit would start to lose in a disproportionate manner to the investments.
Over time, we would destroy shareholder value, so we decided to spin it out. During the process, the debt markets
tightened, causing the private equity buyer to have more difficulty raising money, so the leverage went down.
However, we stayed committed because it was the right thing to do. Every day that passed, we knew we weren’t
the right owners, so it was better for everyone involved for us to close the deal, including the employees of Physio
and our shareholders. I would expect to see more of this activity from us over time. It’s a matter of constantly
pruning the portfolio because dynamics change and markets change.
Advancements in technology are just one reason to divest. Many variables can change the strategic direction of a
business. This is something that takes an incredible amount of discipline. Most companies based in technologies,
whether healthcare companies or IT companies, are very good at acquisitions because it’s in their DNA and is so
critical to growth. Yet most big companies aren’t disciplined enough regarding dispositions. That is why Medtronic
is investing in this process.
Are people embracing the disposition, or divestiture, process as a necessary part of the company’s
development?
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Yes, because the concept makes sense. So yes at a conceptual level, but often times it breaks down when you
start talking about their specific business. That’s why we’re spending so much time on a framework that is logical
and makes sense for all businesses in terms of answering these questions. Is it a growth market? Can we win? Are
we the best owner? There are many sub-questions underneath that level and analytics we’re reviewing to take
some of the emotion out of it. Even when people buy off on it and the company is committed to it, it’s still difficult.
The human element complicates it. When we’re buying a company, it’s usually a good thing since we’re making an
investment. At the beginning, the acquired company may be worried about how they fit into the bigger company,
but over the long term, you’re a better owner, you’re going to invest money, and you have growth plans. It’s
usually a good thing. Often, divestitures are perceived not to be a good thing. Over the long haul, I argue they are
also good because our divestiture is someone else’s acquisition.
How do you communicate these decisions to your internal team?
There’s a big communication element, and it’s important to have a level of transparency and make sure people
understand. On the divestiture side, it’s very similar to integration. Many of the same principles apply, so our
integration people are also managing divestitures. They are similar processes except we don’t usually have to track
divestitures for years. In some cases, we might track them if there are financial ties. To get a reputation as a
divestiture company, you have to be good at transition, help the buyer, and implement a transition services
agreement. Yet in these types of deals, it’s impossible to think of everything. There are models, manuals, and
processes, but experienced people think of something new all the time. How you react to that is important. You
get a reputation with the buyers. I would never buy a company from certain private equity firms based on their
reputation. And there’s another list that I would prefer because when there has been a problem that is not
contractually covered, the team has a conversation and works it out in an equitable manner. As a seller from
Medtronic, I want that type of reputation.
If you develop a practice of regularly pruning your portfolio, are you concerned about internal
segments learning they are potentially for sale before you are ready to communicate it?
It’s not a problem today, but Medtronic hasn’t done a lot of divestitures in the past. However, you want to make
sure that a lot of your planning is done up front, with a small group, so that when you announce your plans, it’s
not on a whim. It needs to be proactive and not reactive to some action of a shareholder or someone else. You
also need to do as much pre-work as possible, but there’s a point in a transaction where you don’t want people to
find out the wrong way because transparency is paramount. There is a point where you can’t go any further
without the risk of a leak, and I think it’s better to be transparent and communicate.
Getting back to our reputation as a good seller, the businesses flourish once they find a better owner. In our
opinion, people within Medtronic will value that and won’t necessarily look at it as a bad thing. That’s the
aspiration, but again, it’s easier said than done. We’ve done a lot of acquisitions but not as many divestitures. The
ones we have done haven’t been a problem.
Since growth is slowing down in med-tech, I think it’s time to do more of them. Medtronic is growing 15 to 20
percent each year, but growth has slowed and capital has become scarcer. In order to go after the markets, such
as emerging markets that we think are a must-win, we need to do it the right way. We must use some of our
precious capital for that. We also share our expectations in terms of EPS accretion and dividends, so we must
make sure we’re satisfying our shareholders. Capital is scarce right now, and if it’s not being fully utilized, it should
be freed up. We plan to do that better than in the past. Investors are much more active now in terms of their
demands. They have more of a voice, and we want to be responsive to that.
I wouldn’t say that Medtronic is opportunistic, but we’re still not where we want to be in terms of our discipline
regarding divestitures. We’re working towards that. Also, there are partners out there, like many of the consulting
firms, accounting firms, and law firms who are also building up practices around this. They can come in and help.
Once you start going through some of these divestitures and flex that muscle a few times, you understand that it’s
still intimidating, but it becomes less of a factor and eliminates a potential mental barrier. Mechanically, it’s
massive project management. As you get better at it, it doesn’t color your thinking as much. Sometimes, you tend
to say that a divestiture is too hard, so you rationalize that the business isn’t that big. We’re hoping our screening
process, as well as going through it a few times, will help us improve in this area.
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BIOS:
is aRoth
G
partner
Kehoe,
at Hunton
II
& Williams in Atlanta, Georgia. His practice focuses on international and domestic public
and private mergers and acquisitions, dispositions, investments, strategic transactions, infrastructure transactions
and public-private partnerships. Roth advises boards of directors in connection with corporate governance, M&A
and strategic transactions, securities compliance and reporting matters. His transactions have involved companies
engaged in a diverse range of business and industries, including biotechnology, payment processing and merchant
acquisition, molecular biology, energy, finance and financial transactions and healthcare. He has been selected for
inclusion as a “Georgia Super Lawyer - Rising Stars,” by Atlanta magazine. Prior to joining Hunton & Williams,
Roth was a Certified Public Accountant and Auditor with Arthur Andersen LLP and an auditor and accounting
systems consultant with Marshall, Jones & Co. Roth received his BS degree from Washington and Lee University,
his MBA in Finance from Tulane University, and his JD from Tulane University, where he served as Managing Editor
of the Tulane University Law Review.
GEOFFREY S. MARTHA
Senior Vice President, Strategy and Business Development
Geoffrey S. Martha will join Medtronic as Senior Vice President of Strategy and Business Development effective
August 29, 2011. In his role, Geoff will have responsibility for leading the development of Medtronic’s global
strategic plan, business development and acquisition integration for the company.
Prior to joining Medtronic, Geoff served as Managing Director of Business Development at GE Healthcare, where he
was responsible for global business development efforts, including acquisitions, divestitures, joint ventures and
equity investments. In his 19-year career with GE, Geoff held several leadership roles in business leadership,
corporate development, strategic marketing, and sales management. His previous roles included General Manager
for Technology Finance, GE Capital’s technology equipment financing business; Senior Vice President, Business
Development for Vendor Financial Services; General Manager for Colonial Pacific Leasing; and Vice President,
Business Development for Potomac Federal, the GE Capital federal financing investment bank.
Geoff received a bachelor’s of science in Finance with highest honors from Pennsylvania State University. He is a
Six Sigma Green Belt and serves on the Penn State Ice Hockey Development Council.
_______________________________________________
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