Medtronic (MDT) announced Sunday an agreement to buy Covidien (COV) in a $42.9 billion dollar cash and stock deal. The 29% premium is thought to be largely justified by the tax advantages Medtronic will receive, with plans to move the executive base to Ireland.
The buyout values COV at $93.22 per share, based on the $35.19 in cash and 0.956 in MDT shares paid by Medtronic in the deal. This gives Covidien shareholders roughly 30% ownership in the new joint company. Medtronic shares were up 4.5% in early trading on Monday morning.
In the announcement Sunday, Medtronic cited a complementary strategy with Covidien’s medical technology as reason for the transaction, not the tax considerations. Though this makes sense in a changing healthcare and reimbursement environment, we see the technology addition as the long-term goal with the tax benefits as short-term reasoning. The buyout will move Medtronic into new arenas, including laparoscopic procedures and weight-loss surgery.
By moving operations to Ireland, Medtronic is undertaking an inversion; an acquisition designed to lower corporate tax rates. The buyout should effectively move Medtronic’s tax rate down two or three percent from its current 18%, according to CEO Oma Ishrak. Tax-inversion is becoming a more common occurrence as corporations seek tax shelter ex-U.S.; see Pfizer’s (PFE) attempted acquisition of British AstraZeneca (AZN).
There are two bills in the U.S. Congress as well as a White House proposal that would all make inversions harder to complete; none of them have received much media attention. This buyout represents yet another signal to budget-conscious legislators that federal tax dollars continue to vacate the U.S.
