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发帖数: 29846 | 1 Medical Merger Part of 'Tax Inversion' Wave
Medtronic's Deal to Buy Covidien for $42.9 Billion Will Help It Sidestep U.S
. Corporate Taxes
Medtronic Inc. MDT -1.10% 's agreement on Sunday to buy rival medical-
device maker Covidien COV +20.45% PLC for $42.9 billion is the latest
in a wave of recent moves designed—at least in part—to sidestep U.S.
corporate taxes.
Covidien's U.S. headquarters are in Mansfield, Mass., where many of its
executives are based. But officially it is domiciled in Ireland, which is
known for having a relatively low tax rate: The main corporate rate in
Ireland is 12.5%. In the U.S., home to Medtronic, the 35% tax rate is among
the world's highest.
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Such so-called "tax inversion" deals have become increasingly popular,
especially among health-care companies, many of which have ample cash abroad
that would be taxed should they bring it back to the U.S. Most notably,
Pfizer Inc. PFE +0.27% recently mounted an aborted takeover bid for the
U.K.'s AstraZeneca AZN.LN -0.62% PLC, in what would have been a
roughly $120 billion deal in part using its foreign cash and aimed at
lowering the U.S. drug maker's corporate tax rate.
Medtronic and Covidien announced the deal on Sunday. Covidien stockholders
will receive $93.22 per share, composed of $35.19 in cash and 0.956 of a
Medtronic share. That represents a 29% premium to Covidien's closing share
price Friday. Covidien shareholders will own 30% of the combined company.
The deal is subject to regulatory approval in a number of jurisdictions
around the world. After completion, the combined company would have its main
executive offices in Ireland. Its "operational headquarters" will be in
Minneapolis, where Medtronic is currently based.
Medtronic had $14 billion in cash as of April, much of it held outside the U
.S.
The deal would enable it to deploy that cash and help Medtronic fulfill its
promise to distribute half of its free cash flow to shareholders. Indeed, a
person familiar with the matter said that was one of the main reasons the
company wants to do the deal.
Thus far, Medtronic has issued billions of dollars in new debt to help fund
share repurchases and dividends rather than bring its overseas earnings back
to the U.S. and face additional tax payments. As of January, Medtronic had
$9.6 billion in long-term debt.
Covidien, the former health-care division of Tyco International Ltd. TYC +
1.39% , became an independent company in 2007 as Tyco began to spin out
its subsidiaries into separate entities after years of aggressive deal-
making by former Chief Executive Dennis Kozlowski. Tyco moved its corporate
headquarters from New Hampshire to Bermuda in 1997, one of the first large U
.S. companies to move to the tax-friendly island.
By the time of Covidien's spinoff in 2007, Bermuda-based companies had
attracted scrutiny from U.S. lawmakers. In 2009, Covidien was one of several
companies to move its headquarters to Ireland from Bermuda in what were
seen as attempts to avoid being subjected to anti-tax-haven legislation.
Part of the rationale was that Ireland enjoyed tax treaties with the U.S.
and other European Union countries that could protect multinational
corporations from legislation aimed at curbing tax avoidance.
For its part, Covidien said at the time that the move would offer increased
strategic flexibility as it looked to expand sales internationally; the
company also cited Ireland's regulatory and legal stability, as well as its
network of tax treaties with the U.S. and European Union, as reasons for the
move.
Meanwhile, Tyco International, the fire and security arm which continues to
use the Tyco name, moved to Switzerland in 2009. Then this May, Tyco's board
decided to move the company to Ireland after Switzerland tightened rules on
executive pay.
Taxes aren't the only reason behind the tie-up between Medtronic and
Covidien. Such a deal also fits with Medtronic's strategy of becoming a one-
stop supply shop for hospitals. Acquiring Covidien "would further enhance
Medtronic's footprint, scale, and product offerings with its hospital
customers," Derrick Sung, an analyst with Sanford C. Bernstein & Co. LLC,
said in a research note to clients.
Talks between the companies began informally about two months ago at a
dinner meeting between Medtronic CEO Omar Ishrak and Covidien CEO José E.
Almeida in Minnesota, the two men said in an interview late Sunday. While
discussing the state of global health care—both CEOs ordered salmon, they
said—the conversation eventually evolved into " why not take a look at how
both companies were fitting together," Mr. Almeida said. The men then
brought the ideas to each of their board of directors and assigned small
teams to evaluate the merits of a combination, Mr. Ishrak said.
Medtronic, which developed one of the first implantable pacemakers in the
1960s, is among the world's largest makers of surgical heart and spinal
implants, which have historically been sold at high profit margins. Under Mr
. Ishrak, Medtronic has also expanded into non-device categories, launching
a hospital-services division that assists hospitals in managing patients. In
Europe, Medtronic helps run hospital labs where patients undergo heart
diagnostic and imaging procedures.
Covidien deals mainly in surgical operating tools and devices such as
peripheral stents, which help prop open collapsed arteries in the legs. With
a broader array of products, hospitals could be more likely to place the
bulk of their business with the combined medical-devices company.
The deal is the latest among medical-device companies, which have seen years
of consolidation among their customers—hospitals and physician groups.
There has been a wave of mergers between hospital systems, as well as
between hospitals and the practices of independent surgeons, over the past
several years. The consolidation has given hospitals greater negotiating
power with suppliers like Medtronic and led to consistent price decreases
for high-end products including implantable cardiac defibrillators.
Medtronic had a market value of about $61 billion Friday, before The Wall
Street Journal reported on the possible deal Saturday. That compares with
about $32 billion for Covidien, which also makes staplers, feeding pumps and
other devices used in surgery.
Some companies are rushing to strike inversion deals before rules on them
are tightened, which U.S. officials have indicated they might do to avoid
losing more government revenue at a time of public budgetary pressure.
To qualify as an inversion, shareholders of the acquired company must
receive stock amounting to at least 20% of the resulting entity.
Covidien's effective tax rate was 14.7% in 2012, and rose to 21.1% last year
due to the settlement of outstanding tax matters by its former parent
company Tyco, the company has said in regulatory filings.
Medtronic reported an effective tax rate of 18.4% in its 2013 fiscal year.
The difference between Medtronic's effective tax rate and the U.S. statutory
rate of 35% was due primarily to keeping earnings from its foreign
operations outside of the U.S., though the company also benefited from
domestic tax breaks such as the research and development tax credit. |
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