Low foreign tax spurs Medtronic to buy a rival

Medical device maker Medtronic's headquarters in Minneapolis.
Medical device maker Medtronic's headquarters in Minneapolis. (ARIANA LINDQUIST / Bloomberg)
Posted: June 18, 2014

Medical device maker Medtronic said it would buy rival Covidien for close to $43 billion, which will help Medtronic challenge competitors such as New Brunswick, N.J.-based Johnson & Johnson and avoid paying some U.S. corporate taxes.

Medtronic is headquartered in Minneapolis. Covidien's leadership operates from a Boston suburb, but it is officially registered in Ireland, which has much lower corporate taxes than the United States. Medtronic will keep operational control in Minneapolis, but officially register in Ireland and have relatively few employees there.

Tax-motivated takeovers have been in vogue, especially among health-care companies that have money parked in foreign banks and don't want to pay tax to bring it back to the United States. In accounting terms, it is called a tax inversion.

New York-based Pfizer tried unsuccessfully to buy U.K.-based AstraZeneca, mainly for the tax appeal. Endo Pharmaceuticals bought Paladin Labs Inc., which allowed it to reregister in Ireland, though it left most of its operational leadership in Malvern.

"The companies do it because they like to have the money, but they argue that they do it for competitive reasons," said Penn Law School professor Michael Knoll, who specializes in international tax policy.

Knoll gave the example of a U.S. company competing with a German company for business in Italy. The German company would only pay tax in Italy on that business activity, whereas the U.S. company would have to pay tax in Italy and likely pay more to meet U.S. tax requirements because the company is registered in America. Knoll said some people want to change U.S. tax laws to make them more "territorial," but there is debate.

"The people rejecting that position think it will only open the door for further abuse," Knoll said.

Meanwhile, Medtronic CEO Omar Ishrak told financial analysts Monday that the company needed to be larger to compete with other companies, such as J&J, that are negotiating with fewer customers because of consolidation of hospital companies and doctor groups.

"This will result in more guaranteed long-term contracts," Ishrak said. Medtronic and Covidien have combined revenue of just under $27 billion.

J&J had $28.49 billion in device revenue in 2013. A big chunk came from products made by Synthes, which was registered in Switzerland but had operational headquarters in Chester County. J&J used an Ireland-registered subsidiary for the $19.7 billion purchase of Synthes in 2012.


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