Medtronic Has a $9 Billion 'Problem'

The roughly $50 billion merger of Medtronic and Covidien freed up $9.3 billion in cash, Medtronic said Thursday. So what's next?

Chris Newmarker

Nearly a year after Medtronic made the controversial decision to merge with Covidien and move its official headquarters from Minnesota to Ireland, the company's executives have an enviable problem: how to spend the initial $9.3 billion in cash freed up by the deal.

The money came from $9.8 billion in overseas funds Medtronic was able to bring back into the U.S. to use, with the company only having to pay $500,000 in taxes, an apparently much smaller rate versus the 35% corporate tax rate Medtronic would have to pay if it was still headquartered in the U.S.

Already, Medtronic has been engaged in a more than $1 billion acquisition spree as it acquires new technologies----the most recent deal involving $110 million for handheld video laryngoscopes used to better intubate patients. Here's a list of 11 companies that Medtronic has acquired or invested in this year.

Medtronic executives say they will soon announce a strategy to use the billions to improve shareholder value.

"The ability to deploy this cash in the U.S. gives us increased flexibility and options. We are working quickly and diligently to determine the best way to utilize this cash, with the priority of creating long-term shareholder value, and will communicate our strategy in the very near-term," Medtronic CEO Omar Ishrak said in a Thursday earnings call transcribed by Seeking Alpha.

Medtronic is also performing well: minus taxes and other Covidien deal-related one-time charges, it earned $1.03 per share in the quarter ended October 30. The profits beat the expectations of analysts polled by Thomson Reuters, who expected earnings of $1 per share.

Revenue, at $7.058 billion, was in line with predictions, and only slightly down from the $7.097 billion that Medtronic and Covidien made during the same period last year. Excluding the effects of the strong U.S. dollar and other currency-related factors, and Medtronic's revenue would have been up 6%.

"Our integration of Covidien is going extremely well, and I am particularly pleased with the way our cultures continue to come together, evidenced by our high talent retention and employee satisfaction, and how we are delivering on the promised cost synergies," Ishrak said in a news release. "Our combination of solid constant currency revenue growth, strong leverage, and increased access to cash is positioning us to create long-term, dependable value in healthcare."

The news sent Medtronic's stock up 56 cents per share, or 0.74%, to $76.67 on Thursday, at the same day that the S&P 500 was down 1.44%, its biggest drop since September.

Chris Newmarker is senior editor of Qmed and MPMN. Follow him on Twitter at @newmarker.

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