Medtronic To Acquire Covidien For $42.9B; Combined Company To Rival J&J

Medtronic announced plans to acquire Covidien for $42.9 billion in cash and stock, in a deal both companies are calling more of a strategic move than a so-called “tax inversion” one.

The combined company, Medtronic Plc, will have the scale and reach needed to compete with Johnson & Johnson, currently the largest medical device company in the world, according to Bloomberg.

The deal, which is expected to be completed by late 2014 or early 2015, will relocate Medtronic’s tax base from the United States to Ireland, where Covidien is based. By moving abroad, Medtronic will pay lower corporate taxes, and could more readily tap much of its $14 billion in cash parked overseas and distribute it to shareholders, the Wall Street Journal reported. Corporate taxes in Ireland are 12.5 percent, compared to up to 35 percent in the U.S., according to the Journal.

Medtronic will retain its operational headquarters in Minnesota despite being formally based in Ireland. Perhaps to deflect criticism that it aims to dodge taxes, the company says the deal will free up cash from overseas, enabling it to pour $10 billion into research and development in the U.S. over the next decade.

In an interview with Reuters, Medtronic chairman and CEO Omar Ishrak downplayed the perception that the driving force behind the purchase was to lower Medtronic’s corporate tax liability. “The real purpose of this, in the end, is strategic, both in the intermediate term and the long term,” he said, while pointing out that Medtronic’s relatively low tax payment rate of 18 percent is unlikely to be lowered much further by the transaction. “It is good for the U.S. in that we will make more investment in U.S. technologies, which previously we could not.”

However, some U.S. lawmakers criticized the transaction and called for a moratorium on deals involving tax inversion, which they call “loopholes” in the U.S. tax system.

“Any company who is paying U.S. taxes today should expect to pay U.S. taxes for years to come regardless of how they try to game the system,” Democratic Sen. Ron Wyden of Oregon, chairman of the Senate Finance Committee, told the New York Times.

Sen. Al Franken, a Democrat from Medtronic’s home state of Minnesota, said in a statement that “deals that result in companies reincorporating abroad often mean that they can shelter profits overseas, costing taxpayers billions of dollars — which I find troubling. This needs careful scrutiny, and I plan to take a very close look at the specifics in the coming days.”

A recent report revealed that the majority of Fortune 500 companies, including Medtronic and many other major medical device companies, avoid paying taxes in the U.S. — which has among the highest tax rates in the world — by stashing billions in tax havens.

“Announcement of this transaction is further evidence the U.S. Congress should act to either enact corporate tax reform, or if that is not possible, significantly restrict inversions for some period of time to give Congress time to enact corporate tax reform,” J. Richard Harvey, a professor at Villanova University Law School, said in an interview with the New York Times.

Earlier this month, Medtronic was said to be preparing a bid for U.K.-based orthopedics company Smith & Nephew, but it seems Medtronic had its sights set on a bigger target in Covidien.