Medical device giant escapes the IRS
Medtronic is spending $43 billion to buy an Irish rival. In doing so, it moves its tax domicile out of the US.
Medical device giant Medtronic (MDT) looks as if it will succeed where the drug behemoth Pfizer (PFE) failed: It is acquiring a rival in large part to move its tax domicile out of the United States, lowering its tax rate.
Medtronic announced Sunday that it has agreed to purchase Dublin, Ireland's Covidien (COV) for $42.9 billion in cash and stock.
Medtronic, now based in Minneapolis, is the second-biggest maker of medical devices after Johnson & Johnson (JNJ), and is a powerhouse that builds implantable heart devices and equipment used in spinal surgery procedures. It had net income of $3 billion on sales of $17 billion in its last fiscal year.
Medtronic will move its corporate headquarters to Dublin, but says it "will continue to have its operational headquarters in Minneapolis, where Medtronic currently employs more than 8,000 people."
That strategy may be the biggest asset Medtronic is getting from Covidien, despite the latter's $10 billion in annual sales of surgical tools, catheters, and scopes.
Until 2007, Covidien was part of Tyco International (TYC), the scandal-plagued roll-up (remember Dennis Kozlowski?) that had its tax domicile in Bermuda. Covidien initially kept the Bermuda tax shelter, but two years later moved its headquarters to Ireland. The whole time, much of its operations were based in Marshfield, Mass.
Earlier this year, Pfizer, the largest drug giant, tried to purchase London's AstraZeneca (AZN) in part to move its tax domicile; the deal ran aground over issues of price and AstraZeneca's desire to remain independent.
In a press release, Medtronic chief executive Omar Ishrak argued that the deal has other benefits, too, giving the new company increased negotiating power with hospitals and governments and a bigger global footprint. But the U.S. corporate tax rate is 35 percent, among the world’s highest, while in Ireland it is just 12.5 percent.
The benefits of changing Medtronic's address -- known as a "tax inversion" -- are more complicated than they would first appear. Derrick Sung, an analyst at Sanford C. Bernstein, said in a note to clients that Medtronic's current 19 percent tax rate is only two points higher than Covidien’s 17 percent rate. (Medtronic's tax rate might go up as it resolves a dispute with the Internal Revenue Service, but would remain low, Sung says.)
But Medtronic currently has $14 billion in cash on its books, and half of that money is overseas. Spending it in the U.S. would mean paying U.S.-level taxes on it. But domiciling in Ireland will allow Medtronic to spend the money with a far lower tax rate. Sung told his clients that the deal could be 7 percent to 12 percent dilutive to Medtronic, but that tax benefits may well make up much of that difference.
There's an obvious reason for Medtronic to push for financial innovations: Sales growth from its technological ones has been slow. Last year Medtronic grew its revenues just 2.5 percent. And innovation has been hard. In 2010, Medtronic spent $800 million, plus milestones to be paid in the future, on a startup called Ardian that had a new device for controlling high blood pressure. "I couldn’t be more excited," its then CEO, William Hawkins, told me. In April, the device failed to show any benefit in a large clinical trial.
Pfizer's attempt to flee its U.S. tax base was a warning shot to American legislators; Medtronic's departure appears to be the real deal. Congress should take the warning, and move quickly both to lower U.S. tax rates (so that companies will feel less need to flee) and to create new barriers to companies executing tax inversions.
"Congress should take the warning, and move quickly both to lower U.S. tax rates"
Not a problem. The Senate will quickly come up with something the House won't pass and the House will quickly come up with something the Senate won't pass. Oblamo will quickly blame everyone else.
Our government punishes those who succeed and rewards the ones that do nothing but want a handout.
What has happened to our GREAT COUNTRY?
We are being sold out by our politicians in Washington.
DON'T YOU JUST LIKE THE NEW POLL THAT SAYS CLINTON AND ODUMA ARE THE MOST ADMIRED PRESIDENTS.
WHO WAS POLLED, FOREIGN COUNTRIES?
Al Gore did the same thing and avoiding taxes by selling his tv station.
lets not forget that msn
All you libs on here just remember Al Gore did the same thing to avoid paying millions in taxes by selling his tv station.
You guys love Al gore so I am sure you will find an excuse as to why he is exempt
The entire tax burden for the United States should not be pushed on to corporations, the upper middle class, and the wealthy. Everyone should pay a fair share.
Buying a foreign subsidiary and moving enterprise to that location could become a trend. Apple could buy Samsung, Intel could buy TSM and Microsoft could buy Lenovo and they could save over $200 billion in taxes. There's nothing like free enterprise!
Why don't we just all pretend like the so called multi-nationals pretend; that we're all domiciled in Ireland or Caiman Islands. Even though our income is from this country.
Then we'll have no tax receipts for basic upkeep; no state income tax or federal.
More bridges and roads will fall apart. Parks and other transit systems will be completely mess. Education will suck even worse. And we can start looking like a 3rd world country.
And in the long run, our income will truly not come from the US because we won't have an income.
Sounds like fun!
The government looks for a way to screw every company they can and then complain about the high cost of medicine. It's about control people and the Democrats want it over every aspect of your life!
Food, healthcare, education, and housing. Pretty much sums it up.
And now the Agenda's from the Neo-Pubs come out wailing about the "tax and spend" MYTHS..
Most Corporations spend very little on overall taxes, when all is said and done..
And what taxes, that are paid are passed on to the end user or consumer...
That's how our Corporation did it....Many of you are very naïve...IMO.
Ahhhh, the Republican Way, or the old "bait and switch" routine....Keep them mulling and off guard.
Copyright © 2014 Microsoft. All rights reserved.
A light news day combined with heavy technicals weighed on the market.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.