Here are some of the key moments so far in the proposed Medtronic-Covidien deal:
Medtronic announced that it has agreed to acquire Irish medtech firm Covidien for $42.9 billion in cash and stock. The purchase is the largest acquisition of a foreign firm by a U.S. company, based on Standard & Poor's Capital IQ data. The deal, expected to close by early 2015, stands to make Medtronic, which was already the fourth largest medical device firm, even more competitive. With total revenue of $14.3 billion, Covidien is a heavyweight in its own right, ranking as the eighth largest device company. In the same time period, Medtronic's total revenue was $16.7 billion. For the sake of comparison, diversified healthcare behemoth Johnson & Johnson had total revenue of $28.6 billion in that same time period. The merger will give the firm 87,000 employees based throughout more than 150 countries.
By early August it was becoming increasingly obvious that President Barack Obama and other progressive politicians didn't approve of the Medtronic deal and other so-called "inversion deals," which allow U.S. companies to move foreign earnings back into the country without paying U.S. corporate taxes. The Federal Trade Commission asked for additional information and documentation around the Medtronic-Covidien merger. And the Obama administration was considering some kind of executive action to hinder such deals, since anti-inversion bills appeared unlikely to pass Congress.
Medtronic CEO Omar Ishrak around the time defended the Covidien purchase during an interview with CNBC: "What I do know is for us, the structure with Covidien was first and primarily driven by strategy from a healthcare perspective, in that together we could provide more value to the healthcare system and be a much more effective combination. And then once we determined that, then we assessed the most efficient structure through which we can operate more effectively as a company."
|Former Sen. Trent Lott , R-MS (Image courtesy of Wikipedia)|
News came out that Medtronic had paid $200,000 to lobbyists including former U.S. Sens. Trent Lott and John Breaux to handle issues in Congress over the deal--but another indication of how seriously Medtronic officials took the political blowback. In the first half of 2014, Medtronic has spent $2.84 million on lobbying fees--placing it on track to beat the $5.02 million it spent on lobbying last year, according to the watchdog group Citizens for Responsibility and Ethics in Washington.
News of the additional lobbying came around the same time that the Federal Trade Commission is asking for additional information and documentation around the Medtronic-Covidien deal. It is but another indication that President Obama clearly doesn't like Medtronic's plan to move its headquarters to Ireland through the purchase.
|The acquisition of Covidien is the boldest move yet announced by the company since Omark Ishrak took the reins of the company. Some of the company's shareholders, however, were not overjoyed by the merger.|
Medtronic CEO Omar Ishrak also got an earful from longtime shareholders during the company's annual meeting, held 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. "There is a pain here, which I understand, and I don't deny," acknowledged Ishrak in the company's annual meeting gathering, according to the Star Tribune of Minneapolis.
Medtronic has downplayed the its own tax benefits it would incur by moving its headquarters to Ireland. And the complaints of a few shareholders related to a short-term tax payment seemed unlikely to scuttle the deal.
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.
Shares of Medtronic and Covidien were both trading down--a day after the Obama administration took actions that call into question the tax benefits Medtronic was set to enjoy from the proposed $43 billion merger. Medtronic officials were studying the U.S. Treasury Department moves, which would make it harder for an inverted company to move overseas funds back into the U.S. tax-free.
The situation was further complicated for Medtronic and Covidien because Medtronic had been reportedly looking to draw on its billions in foreign reserves to help pay for the deal interest-free. Now, Medtronic might have to turn to outside financing.
Medtronic announced it would draw on $16 billion in external financing.
"This proposed acquisition was conceived and undertaken for strategic reasons and is intended to create a company that can treat more patients, in more ways and in more places around the world," Omar Ishrak, chairman and CEO of Medtronic, said in a news release. "We believe our combination will be uniquely positioned to help advance the goals of the Affordable Care Act in the U.S. as well as the objectives of virtually all health systems - to drive access to high-quality, affordable health care for patients around the world."
A shareholder sues Medtronic executives and board members over their $63-million tax-compensation plan related to the company's acquisition of Covidien. The lawsuit--filed October 3 in U.S. District Court in Minnesota--claims the defendants reimbursed themselves for taxes they would owe in an inversion. A previous shareholder lawsuit, filed August 29, claimed that Medtronic "utterly failed to disclose that defendants intended to 'reimburse' themselves with respect to the excise tax requirement to the tune of $63 million," in an July 11, 2014 proxy statement filed with the U.S. Securities and Exchange Commission.
At this point, the U.S. Federal Trade Commission, the European Union and Canada's Competition Bureau had approved the acquisition, according to Medtronic. Only permission from Chinese regulators and sanction by the High Court of Ireland still needed to be cleared at this point.
A four-member subcommittee of the Minnesota State Board of Investment decides not to cast votes when Medtronic and Covidien shareholders decide on the deal, with voting scheduled for Tuesday, January 6.
Critics on the board were concerned about supporting a deal that would allow Medtronic to avoid paying U.S. taxes. Meanwhile, Minnesota Gov. Mark Dayton's office supported the deal because Medtronic officials personally promised the governor that the merger--now worth $48 billion--would bring another 1000 jobs to the North Star State, according to the Star Tribune.
Shareholders of Medtronic and Covidien on Tuesday overwhelmingly approved the companies' multibillion-dollar merger, which will create a new Medtronic based in Ireland. The only step now is for the high court in Ireland to approve the deal.
Covidien announced January 12 that the Irish High Court had agreed to set a hearing January 26 to decide on the merger.
The Irish High Court sanctions the merger, allowing Medtronic and Covidien to complete the deal on the same day.
|Refresh your medical device industry knowledge at MD&M West, in Anaheim, CA, February 10-12, 2015.|
Like what you're reading? Subscribe to our daily e-newsletter.