Medtronic's Covidien Deal Could Sting Shareholders

As we earlier reported, Fridley, MN-based Medtronic has announced that it is acquiring Irish medtech firm Covidien in what is being billed as the largest-ever acquisition of a foreign firm by a U.S. company.

While the deal will result in tax and other savings for the combined company, Mark Reilly, managing editor of the Minneapolis / St. Paul Business Journal, reports that the way it was set up may not taste so sweet to some shareholders. As Reilly explains, the $42.9 billion offshore shuffle isn't treated as an acquisition for tax purposes, but as a sale. That means investors will pay taxes on it, and longtime owners of Medtronic stock could feel it the most.

According to Reilly, "Although the deal is a de facto acquisition-- Medtronic's CEO will be in charge, the combined company will be called Medtronic, Medtronic shareholders will own most of it -- it's really creating a 'new Medtronic' and selling both Medtronic and Covidien to the new company."

The Minneapolis Star-Tribune's Lee Schafer wrote that "When holders exchange their Medtronic stock for shares in an Ireland-based company the regulatory filings refer to as 'New Medtronic,' it's treated like a sale -- a sale that will generate a tax but no cash proceeds that could be used to pay it."

Schafer continued, "Medtronic hasn't hidden this information, exactly, but all Chief Financial Officer Gary Ellis said on the Monday morning investor conference call was 'it should also be noted' that the transaction will be a taxable event for federal income tax purposes for both Medtronic and Covidien shareholders."

"That means," Reilly says, "shareholders will have to pay for gains they realize on Medtronic's stock. For people that own it through mutual funds, they might not even notice. But direct investors, who have held the stock for more than a year, could see federal tax rates of 15 or 20 percent. If they're high-income earners, combined with Minnesota and other taxes, that could rise to 30 percent."

But that's not the worst of it, according to Schafer. "The real old-timers who have held Medtronic stock for 30 years could have bought it at less than 50 cents per share, adjusted for splits," he says. "The taxable long-term gain for those folks will be all but equal to the price of the stock."

Timothy Hay, writing for the Wall Street Journal's Venture Capital Dispatch blog, quotes Mir Imran, chairman of medtech accelerator InCube Labs, as saying, "The impact of this will be felt for many years." Imran elaborated, "Prior to this merger, Covidien was very acquisitive of startup companies, and Medtronic was also quite active. But post-merger, the new Medtronic will be focused on integrating the two businesses ... so, for the next two or three years, [they] will be less focused on investing in and acquiring young companies. For the world of med-tech startups, this is not good news."

Stephen Levy is a contributor to Qmed and MPMN.