Corporate inversion is front page news as Medtronic (NYSE: MDT) acquires Covidien (NYSE: COV) for $42.9 billion and establishes corporate offices in Ireland. It follows a similar path of tech giants Google and Microsoft, which have set up subsidiaries in Ireland. Although it plans to keep its production facilities in Minnesota, Medtronic wants to benefit from Ireland’s relatively low corporate tax rate and move its corporate headquarters to Ireland. That’s one of five things to consider with this deal.
Deal size goes against Medtronic game plan: In an analyst note obtained by MedCity News, Debbie Wang, Morningstar’s analyst for Medtronic, said that the size of the deal is big for Medtronic. “This transaction is definitely a departure from Medtronic’s acquisition strategy targeting smaller deals and is a definitive moment for CEO Omar Ishrak, whose tenure at Medtronic had been rather uneventful to this point.”
What’s Covidien’s product offer like? Covidien’s business spans laparascopic surgery devices, electrosurgical tools, and soft-tissue repair products. It also covers surgical staplers, vascular therapy, respiratory devices and patient care. Medtronic will also be able to supplement its heart monitoring devices with Coviden’s patient monitoring division. Add to that Covidien’s medical supplies business. Also, Medtronic and Covidien (through its acquisition of Zephyr) have demonstrated increasing interest in wearable devices. Although it’s early days, that could be an interesting area of development for these two companies.
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Freeing up that overseas cash on the books: Several analysts have noted that Medtronic is paying out more than it needs to for long-term gain. The deal will help Medtronic deploy some of the $14 billion it’s holding overseas to shareholders, The Wall Street Journal reports, which is what’s driving the whole deal in the first place, according to its source. It also fulfills a promise to shareholders as painlessly as possible. Medtronic can use some of the money it saves in taxes to invest in technology, such as early-stage venture investments. That’s one of the areas in which it is allocating $10 billion over the next 10 years, according to a company statement.
Makes it more competitive with Johnson & Johnson: Remember J&J’s deal with Synthes in 2012? That’s a good frame of reference for this deal, says Wang. Medtronic values Covidien at 4.2 times its sales. J&J paid 5.4 times sales, but the company had a lot to offer in the way of higher operating margins and more attractive growth opportunities.
“We think Medtronic must extract significant synergies from the acquisition to justify this premium — an initial target of $850 million from back office, manufacturing, and supply chains by 2018 is a good start. Interestingly, Ishrak has suggested Medtronic’s tax rate, which has hovered in the midteens over the past four years, will not change materially after the deal, so any cost savings have to come from operations.”
It’s not about devices – it’s corporate tax reform: Medical device companies have warned that they would have to look at alternatives to keep costs down as a result of the medical device tax. But, as Matt Herper of Forbes points out, that interpretation is flawed. When it comes to big businesses, it’s more about inversion. Inversion started becoming a thing in the 1990s as companies moved to park corporate offices offshore in locations with more favorable tax rates, but there has been a resurgence since 2012. Bloomberg calculated that in the past two years, 44 American companies have reincorporated overseas or have inked deals to do it. Medtronic is the largest company to date to do it. Independent tax consultant Robert Willens told Bloomberg that Medtronic has trimmed its tax bill in recent years by accumulating $20.5 billion of untaxed earnings in offshore subsidiaries.
