Medtronic To Go Ahead With Covidien Deal Despite Reduced Tax Benefits
Medtronic announced last week that it will go ahead with its Covidien buyout despite a recent notification by the U.S. Department of the Treasury and the Internal Revenue Service discouraging tax-avoiding corporate inversion deals. Per the new guidelines, companies will not be able to avoid paying U.S. taxes when accessing their foreign subsidiary’s earnings by employing innovative techniques such as “hopscotch” loans. In addition, former owners will now have to own less than 80% of the new combined entity to be able to effectively invert. The new rules also target “spinversion”, a practice wherein a U.S. entity spins off a portion of its operations and assets into a new foreign corporation and avoids paying taxes on its earnings. These spun off entities will now be treated as domestic corporations, and therefore will not serve the purpose of tax avoidance.
Medtronic was among several U.S. companies which had come under fire from the U.S. government on account of its plans to relocate to Ireland in a bid to avoid taxes, specifically on its cash held overseas. In addition to acknowledging the potential tax benefits, Medtronic reiterated the strategic benefits of this deal before announcing its intention to stick with the initial acquisition plan. However, the medical device maker will now be raising $16 billion in external debt to finance the $43 billion acquisition instead of using cash from its foreign units, as earlier planned.
The government’s new rules will make it difficult for Medtronic to avoid paying taxes when using its $14 billion cash, most of which is outside the U.S. However, the fact that Medtronic is sticking with the Covidien acquisition despite lower tax benefits than earlier anticipated validates the company’s stand that it isn’t just a tax inversion deal. The deal is also likely to be a strategic win for Medtronic as Covidien’s expansive portfolio of surgical solutions, vascular therapies and patient care services will enhance Medtronic’s existing product portfolio and also create entry points into new areas such as medical supplies and emerging markets. The combined entity, with a presence in more than 150 countries, could also drive more value and improve operational efficiency by offering various healthcare and diagnostic products and services as a package to its customers. Covidien generated over $10 billion in revenue in 2013 compared to Medtronic’s $17 billion, with about 50% of sales coming from outside the U.S.
