Medtronic-Covidien merger a match made in tax heaven

The high U.S. corporate tax rate was matchmaker in the deal announced Sunday in which medical-device maker Medtronic agreed to purchase Covidien PLC for $42.9 billion, according to an article in the Wall Street Journal.

While its U.S. headquarters is in Minneapolis, Covidien is domiciled in Ireland, where the corporate tax rate is 12.5 percent, compared to 35 percent in the U.S. Medtronic also is based in Minneapolis, where the deal was struck between the two CEOs, reportedly over a salmon dinner. Omar Ishrak heads Medtronic and Jose E. Almeida leads Covidien.

Covidien stockholders will receive $93.22 a share, representing a 29 percent premium to the company’s share price at closing on Friday. Covdien stockholders will receive $35.19 in cash and 0.956 of a Medtronic share, $60.70 at close on Friday. When the deal (subject to regulatory approval in many countries) is completed, the combined company will be headquartered in Ireland.

So-called tax-inversion deals have become particularly popular among health care companies, which typically hold large amounts of cash abroad, according to the WSJ. The merger would enable Medtronic to deploy cash held abroad to fulfill promises to shareholders that it would distribute half of its free cash flow. According to the article, Medtronic has issued billions in debt rather than pay U.S. taxes on any of its $14 billion held abroad.

The two companies are also likely to find a number of synergies between the two businesses. Medtronic is one of the world’s largest makers of implantable heart and spine devices, but has recently broadened beyond medical devices in launching a hospital services division that helps European hospitals run diagnostic and imaging labs.

Covidien, which was spun off from Tyco International in 2007, manufactures surgical operating tools and devices, including contrast media and delivery systems for the medical imaging market. It moved its headquarters from Bermuda to Ireland in 2009.

“With a broader array of products, hospitals could be more likely to place the bulk of their business with the combined medical-devices company,” the WSJ article concludes.