Medtronic Flees U.S. Corporate Tax Rate With Covidien Takeover

Source: Thinkstock

Source: Thinkstock

It looks like Minneapolis-based company Medtronic Inc. (NYSE:MDT) will succeed where Pfizer, Inc. (NYSE:PFE) failed with AstraZeneca plc (NYSE:AZN). The company, which manufactures medical devices sought a takeover of one of its largest competitors, and unlike Pfizer Inc. and AstraZeneca, Covidien plc (NYSE:COV) — which is based in Dublin, Ireland — has taken the bait.

Medtronic will pay $42.9 billion for Covidien, the company announced in a statement Monday. The company is the second largest manufacturer of medical devices after rival Johnson & Johnson (NYSE:JNJ), according to a recent report from Forbes. In particular, Medtronic is known for making implantable heart devices and equipment that is used in spinal surgery procedures. Last year, the company had a net income of $3 billion on sales of $17 billion in its last fiscal year.

Medtronic has the same game plan as Pfizer with the move. The company is re-locating to its Dublin, Ireland, drawn in, in part, by the country’s lower corporate tax rate in an effort to escape the IRS. Though the company will be relocating its tax domicile, Medtronic adds that it will “continue to have its operational headquarters in Minneapolis, where Medtronic currently employs more than 8,000 people,” the company’s statement reads.

“This acquisition will allow Medtronic to reach more patients, in more ways, and in more places,” Medtronic Chair and CEO Omar Ishrak said in a statement, per CNBC. Although some suspect that the primary goal of the takeover is re-locating the company’s tax domicile to the much more corporate friendly Ireland. Bloomberg notes that the company is to become the biggest ever to renounce the U.S. corporate tax rate by re-locating to Europe; thus far, 44 different U.S. corporations have taken the plunge and reincorporated abroad. Further, 13 of those companies relocated in the last two years, Bloomberg continues.

That makes sense, Forbes notes. After all, the United States corporate tax rate is currently 35 percent, among the world’s highest, whereas in Ireland, it is just 12.5 percent. Had Pfizer’s takeover of AstraZeneca gone according to plan, the company would have saved more than $1 billion a year in taxes alone. Medtronic executives, however, argue that there are a myriad of other benefits that come with the acquisition; Medtronic’s CEO Omar Ishrak even said in an interview with Bloomberg that the acquisition was “not about lowering tax rates. What we will have is access to cash generated outside the U.S. We’ll use that to invest much more aggressively in the U.S.,” he added.

Both the news of Pfizer’s persistent pursual of AstraZeneca as well as Medtronic’s successful takeover of Covidien, Forbes says, should act as a warning to U.S. legislators, signaling that U.S. corporations aren’t willing to put up with sky high tax rates any longer.

As for the Medtronic deal, Cambridge, Massachusetts-based healthcare industry consultant Harry Glorikan said the pace of consolidation is picking up — in part because hospitals and physicians are trying to deliver more integrated care to their patients.

“Everyone needs more muscle now,” Glorikan said, in an interview with the Boston Globe. “Suppliers have to sell into larger healthcare systems under the Affordable Care Act. These two companies coming together gives them a broader footprint in the U.S. and globally. Companies are finding it harder to make as much as they did in the past, so they have to be able to offer more products and services.”

Forbes adds that Medtronic is having to rely on financial innovations in part because sales growth from technological innovations have proved hard to come by. The company saw revenue growth of just 2.5 percent last year; further, a $800 million takeover a medical device startup, called Ardian, hasn’t panned out. An experimental device the company made to control high blood pressure showed no effect in clinical trials.

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