Is Medtronic Making Good on Its Post-Merger Promise?

In announcing its $42.9 billion inversion deal with Covidien two years ago, Medtronic vowed to use some of its new financial flexibility to invest $10 billion in U.S. medical technology over the coming decade.

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Two years ago and some change, Medtronic sent shockwaves through the medical device world with the news of its $42.9 billion acquisition of Covidien through a tax inversion deal that moved the company’s corporate headquarters to Ireland and freed up $9.3 billion in cash that had previously been trapped overseas.

The announcement came with a promise, however. As a direct benefit of the company’s new financial structure, Medtronic vowed to make $10 billion in U.S. technology investments over the coming decade in areas such as early stage venture capital investments, acquisitions, and R&D – above and beyond existing plans that either company already had in play.

“The medical technology industry is critical to the U.S. economy, and we will continue to invest and innovate and create well-paying jobs,” Medtronic CEO Omar Ishrak said that otherwise-quiet Sunday in June 2014. “Medtronic has consistently been the leading innovator and investor in U.S. medtech, and this combination will allow us to accelerate those investments. These investments ultimately produce new therapy and treatment options that improve or save lives for millions of people around the world.”

Like many American multinational corporations, Medtronic was sitting on a huge pile of cash from overseas revenue, but spending that money in the United States would cost the company too high a tax to make it worthwhile. So it continued to sit on its growing overseas riches until an opportunity came along that allowed the company to reincorporate outside the U.S. borders, while also taking out a worthy competitor.

The company was quick to start making good on that $10 billion promise too. After closing on the Covidien acquisition in January 2015, Medtronic went on a record-breaking shopping spree, announcing more than a dozen smaller acquisitions and strategic investments in the first year alone. The financial details of some of those purchases were not disclosed, however, making it tough to estimate how much the company has invested so far since the merger.

Medtronic also seemed to slow its roll, so to speak, during the second half of 2016, after agreeing to buy Framingham, MA-based HeartWare International for $1.1 billion.

As expected, Medtronic’s balance sheet has also benefited greatly from combining with Covidien. Since the merger was completed, the company’s quarterly revenue has ranged between $6.93 billion (third quarter of the fiscal year 2016) and $7.92 billion (fourth quarter of the fiscal year 2017). For comparison, Medtronic’s revenue for the five quarters leading up to the closing ranged between $4.16 billion (third quarter of the fiscal year 2014) and $4.57 billion (fourth quarter of the fiscal year 2014).

The company’s cash flow statements show a similar gain. Medtronic reported free cash flow of $4.56 billion on April 30, 2015, compared to its most recent annual cash flow statement on April 30, 2017, that showed a free cash flow balance of $5.62 billion.

For the company’s longtime investors, the merger was more of a double-edged sword though, and a shareholder lawsuit over the deal is still in play. Last month the Minnesota Supreme Court ruled that the lawsuit, which was filed in 2014 after the Medtronic-Covidien merger was announced, will be allowed to proceed. The plaintiffs argue that investors were harmed by the deal because they were forced to pay millions in capital gains taxes. The inversion deal also created millions of new Medtronic shares that were issued to Covidien shareholders as part of the transaction, which diluted the holdings and voting rights of existing Medtronic shareholders, according to the lawsuit.

The recent ruling did not express an opinion on the underlying merits of the case, according to a Star Tribune report, but simply sends it back to the district court for a possible trial. The lower court previously dismissed the case and said shareholders did not have the ability to sue under Minnesota law, but the state’s high court decided that a key portion of the lawsuit should proceed.

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