Medical device maker Medtronic Inc (NYSE: MDT) announced on Sunday that it had agreed to purchase Covidien PLC (NYSE: COV) for $42.9 billion in cash and stocks. It was also announced that they will move its company’s base to Ireland, a move known as inversion.
Medtronic Inc is the world’s largest medical device maker who sells pacemakers, stents and defibrillators. Covidien PLC makes devices used for surgical procedures such as feeding pumps, ventilators, and surgical staples. Acquiring Covidien PLC would give Medtronic a larger competitive edge over its main rival in the medical device industry, Johnson & Johnson (NYSE: JNJ).
“It makes sense on a lot of levels, both strategic and financial,” Jefferies analyst Raj Denhoy said of the potential combination. There are a lot of reasons to believe it is going to happen.”
There have been several mergers within the medical device industry recently. Zimmer Holdings Inc (NYSE: ZMH) recently announced a $13.4 billion takeover over rival Biomet Inc, an orthopedic device maker. Pfizer (NYSE: PFE) announced its bid for AstraZeneca (NYSE: AZN) but was rejected.
Medtronic, the Minneapolis based company also announced it will reallocate its base to Ireland. This increasingly popular strategy known as an inversion would pay a substantial lower corporate tax rate. The company claims the deal is about its synergy with Covidien PLC, not its reduced taxes. Medtronic downplays the inversion deal; something Pfizer failed to attempt to do which ultimately lead to its rejection.
The company stated its operational headquarters would remain in Minneapolis and even pledged $10 billion in technology investments over the next 10 years. Medtronic Chief Executive, Omar Ishrak said its corporate tax rate will still be around 18 percent. The company has over $14 billion in cash in which most of it is outside of the United States. Taxes would not be applied until the company brings the profits back into the United States.
Inversions do no cut taxes on U.S earnings, but can protect income around the world from the lofty 35 percent corporate tax rate in the U.S. The U.S government began cracking down on inversions about ten years ago. A company cannot simply move its company’s headquarter overseas, and if they do, they may end up paying a substantial amount in extra taxes, penalties and interest.