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Some Medtronic Shareholders Don't Like Covidien Merger

President Obama and other U.S. politicians aren't the only people who don't like Medtronic's proposed $43 billion acquisition of Covidien, which would allow it to save money on taxes by moving its headquarters from Minnesota to Ireland. Medtronic CEO Omar Ishrak also got an earful from longtime shareholders during the company's annual meeting, held Thursday at the Fridley, MN-based company's Mounds View, MN campus. Why don't the longtime shareholders like a $17 billion-a-year medical device company becoming a $29 billion-a-year medical device company? Ironically, it is the same reason that corporate officials structured the deal as an inversion: taxes. The deal would cause the shareholders to exchange their present stock for stock in the new Ireland-based Medtronic plc, and in the process they would be stuck with a surprise capital gains tax on all the extra value the stock gained over the decades. "It's a problem," said longtime investor Patricia Hartlaub, 71, of New Brighton, MN, who was quoted by the St. Paul Pioneer Press. She drew a chuckle from the mostly senior citizen audience by saying that "long term for us is short." "There is a pain here, which I understand, and I don't deny," Ishrak told the annual meeting gathering, according to the Star Tribune of Minneapolis. Brooks West, an analyst with Piper Jaffray Co. in Minneapolis, tells the Pioneer Press that the longtime shareholders are unlikely to scuttle the deal, however. That's because the institutional investors that own much of Medtronic's stock are more concerned about the company's ability to grow over the long-term, versus short-term tax hits. The tax inversion deals, which have been termed the "holy grail of tax avoidance" by a number of U.S. politicians, have been picking up recently as a growing number of companies look for ways to reduce their tax burden. As many as 25 U.S. companies are considering relocating their headquarters to low-tax destinations, according to the Irish Times. The corporate tax rate in the United States is 35%--the highest nominal rate in the world, leading a number of companies to look for new domiciles in low-tax nations such as Ireland, the United Kingdom, Switzerland, and the Netherlands. Medtronic has also pointed out that the U.S. is one of only six OECD countries that imposes on its businesses the world-wide taxation of corporate profits. Inversion would free up billions of dollars for Medtronic that company officials say could then be invested back in the United States. "We're going to invest it in medtech in an area where we've got proven capability to improve patients' lives and make a difference in health care. And that'll improve jobs. High paying jobs will be brought to the U.S. in medtech," Ishrak said Thursday, according to Minnesota Public Radio. The Covidien acquisition would also allow Medtronic to expand its mission, company founder Earl Bakken said in a recently disclosed message. "We can serve more patients, in more ways, and in more places around the world than ever before. Instead of saying Medtronic improves a life 'every 3 seconds,' I expect that we'll eventually be able to say 'every second.' Imagine that! And with Covidien sharing our 'patient first' focus, think of all the good we can do," Bakken said. But in a recent speech in Los Angeles, Obama said, without naming names, that companies looking to move their headquarters offshore for tax benefits are "technically renouncing their U.S. citizenship." The Financial Times also quoted the President as saying: "My attitude is: I don't care if it's illegal. It's wrong... You don't get to pick the rate you pay." Democrats in both chambers of Congress agree and are supporting a law to limit such deals in the future. One bill, supported by U.S. Treasury Secretary Jacob Lew, would be retroactive to May of this year, potentially affecting the Medtronic-Covidien deal. Recently, four senators introduced a plan known as the "No Federal Contracts for Corporate Deserters Act," to make such deals less attractive. A number of Republicans also have expressed their disfavor for such tax deals but don't agree with Democrats on how to address the issue. The chances of Congress passing that legislation in the near future are limited. As a result, the Obama administration is considering options to go around Congress and do away with many of the tax-shielding incentives involving corporate inversion deals, which include Medtronic's planned $43 billion acquisition of Covidien. Enacting policies to thwart future inversion deals would help buy time as the administration plans on overhauling the U.S. tax system. Any congressional or IRS action could give either Medtronic or Covidien the ability to step away from the deal, according to a New York Times report. Medtronic has paid $200,000 to lobbyists including former U.S. Sens. Trent Lott and John Breaux to handle issues in Congress over the deal. The companies still expect the merger to close in late 2014 or early 2015. Meanwhile, Medtronic isn't the only medtech company facing criticism over potentially moving its headquarters overseas. Hospira is also taking flak--even though it is only rumored so far to be in talks with French company Danone for a so-called "inversion" deal.

Refresh your medical device industry knowledge at MEDevice San Diego, September 10-11, 2014.

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

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