US Congress May Push Back on Medtronic


The Obama administration is cracking down on companies moving operations overseas for tax-inversion purposes, a move that could hold negative implications for Medtronic ($MDT) in its $43 billion proposed deal with Covidien ($COV).

Treasury Secretary Jacob Lew issued a letter on Tuesday to congressional tax-writing committees, urging lawmakers to limit inversions through a quick legislative overhaul, The Wall Street Journal reports. Lew suggested making the legislation effective immediately and retroactive to May 2014, potentially disrupting deals that have already taken place.

“What we need as a nation is a new sense of economic patriotism, where we all rise or fall together,” Lew wrote in his letter to Congress (as quoted by the WSJ). “We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes.”

Meanwhile, Medtronic continues to defend its acquisition of Dublin-based Covidien as not purely motivated by tax-inversion purposes. The company acknowledged that it would enjoy certain tax advantages, saving $3.5 billion to $4.2 billion by moving its domicile overseas. But CEO Omar Ishrak emphasized the companies’ combined med tech prowess as a primary motivator for the deal. Medtronic will inherit major device and imaging businesses and will employ 87,000 individuals in more than 150 countries.

“Our collective portfolio for open and minimally invasive procedures will give us a broad platform over a wide range of surgical specialties,” Ishrak said when the deal was announced in May. “We believe Medtronic’s deep expertise will accelerate introduction and rapid adoption in markets around the world.”

Ishrak also noted the company’s commitment to medical technology in the U.S. as a result of the merger. The CEO promised to invest $10 billion in technology in the U.S. over the next 10 years, funneling money into early stage venture capital, acquisitions and R&D.

But not all med tech outfits are as eager to jump on the tax inversion bandwagon.  Earlier this week, Abbott Laboratories ($ABT) CEO Miles Whitetold Wall Street analysts on a conference call that he does not view inversion as a “strategic imperative” and that companies should consider impending tax reforms when deciding to move operations overseas.

Abbott recently sold its developed world generic drug business to Mylan ($MYL) for $13 billion, shifting its focus toward diagnostics and devices. The deal had an inversion element for Mylan. Following the deal’s closure, the generic and specialty pharma company will organize itself in Netherlands under the name Mylan N.V. and see its effective tax rate fall from 35% to around 20%.

– read the letter
– read the Wall Street Journal story (sub. req.)