Medtronic-Covidien deal: Medtech follows lead of technology companies seeking offshore tax breaks

Irish and shareholder eyes may be smiling at the prospect of medtech giant Medtronic acquiring Covidien and moving its headquarters to Ireland, where Covidien is based, but the $42.9 billion deal is causing at least a few frowns, as well. Minneapolis-based Medtronic is the largest U.S. company to try to change its tax domicile through what the financial community calls an inversion, reports the New York Times.

Like many U.S. companies operating on the global stage, Medtronic has significant piles of cash parked overseas that it is understandably reluctant to repatriate to the United States and subject to a 35% corporate tax rate, among the highest in the world. “Covidien’s overseas cash and future earnings from its businesses will not be subject to the U.S. repatriation taxes, giving the enlarged Medtronic a new source of cash it can use freely,” writes the Times’ David Gelles.

It should be noted, however, that good stewardship by former Medtronic CEO Bill George has bequeathed the company with a more favorable tax rate of 18%, and the inversion would reduce the burden by only a couple of percentage points, according to analysts. Current CEO Omar Ishrak also downplayed the role that tax benefits played in this decision, noting that the company planned to invest $10 billion in the United States over the next 10 years. “The combined company should generate significant free cash flow, which can be deployed with much greater flexibility,” he said during a conference call on June 16.

The Medical Devices Group on LinkedIn hosted a spirited discussion on the topic, with most commenters praising the deal as a win-win that will create “the world’s largest device company (if not this year, in a few),” writes Bruce Carlson, Publisher, Kalorama Information. “Combined they could eclipse J&J in 2014, especially as J&J sells units,” he adds.

Many Medical Devices Group members see this as a harbinger for the medtech industry, which will follow en masse the example of global technology companies that have been offshoring their headquarters to take advantage of tax breaks. For medtech professional Michael Faraino, Congress should consider this move as the proverbial canary in the coal mine and “lower the corporate income tax rate and allow repatriation of offshore earnings back to the United States at a reasonable rate.” Many group members agree with him that this would boost innovation and employment in the United States.

As with most mergers, layoffs can be anticipated, and Jörg Kunz, head of Marketing and Public Relations at Bramherzige Brüder gemienützige Träger GmbH, suggests that the disconnect between core brand messaging and real market behavior is affecting corporate credibility. Patients first? Employees are our most valuable asset? “Sometimes I feel it would be better to be savagely honest,” writes Kunz. “‘It’s all for the money, but the good news, my dear patient, [is] that you will also experience (as a nice side effect) quite some disruptive benefit.'”

Well, that would be refreshing, but let’s not hold our collective breath.