Medtronic megadeal throws unwelcome light on Irish tax advantage
Proposed combination of medical device giants raises fresh concerns about ‘corporate inversion’
Covidien’s strengths in surgical equipment , vascular and ventilators will complement Medtronic’s existing product range. Photograph: Munshi Ahmed/Bloomberg
It’s the largest deal in medical devices in almost 30 years. More importantly, Medtronic’s $42.9 billion proposed acquisition of rival Covidien makes it the largest company to date to engineer a path out of the clutches of the United States for its corporate HQ. And Ireland, somewhat uncomfortably, finds itself in the middle of the story.
However, like many multinationals that have legally relocating their domicile, most of Covidien’s business operations continued to be run out of the US, in its case, Mansfield, Massachusetts.
The attraction of Ireland to a company which was at the time trying to escape the stain of scandal associated with its former, then jailed chief executive Dennis Kozlowski, was that at a time when the US administration had signalled its intention to clamp down on tax haves, Ireland was seen as the respectable face of corporate tax planning.
Medtronic conspicuously downplayed the tax element of its proposed merger with Covidien this week, with the two companies focusing instead by a “complementary strategy” with Covidien on medical technology.
“The real purpose of this, in the end, is strategic, both in the intermediate term and the long term,” said Medtronic chief executive Omar Ishrak.
And in a diversionary move, Ishrak even highlighted plans to spend $10 billion “to stimulate the medical-technology industry in the US” in the decade after the deal closes.
Formidable competitorOf course, it is true that Covidien’s strengths in surgical equipment , vascular and ventilators will complement Medtronic’s existing product range. Its scale will make it a more formidable competitor in the US hospital market.
And its strength in emerging markets will give Medtronic better access to faster growing regions as healthcare providers in traditional markets clampdown on budgets.
However, in a telling paragraph in its filing with the Securities and Exchange Commission, it emerged that it will be open to Medtronic to walk away from the deal if US tax law changes.
That tax clause would come into play if both houses of the US Congress pass legislation that would treat the combined company as an American corporation for federal tax purposes, even before such legislation was signed into law by the president.
So tax is at the heart of the validation of the deal. By one estimate, the deal, if successful, could save the combined entity $850 million in taxes by 2018.
Related to that consideration is access to billions of dollars in earnings of its foreign subsidiaries that are currently trapped abroad.