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After Tax Inversion Deal, Medtronic to Pay $500 Million to U.S. Treasury To Move $9.8 Billion To United States

Oct 1, 2015

In a restructuring that is part of its $49.9 billion merger with Dublin-based Covidien, Medtronic will pay a one-time tax charge of $500 million to the U.S. Treasury so that it can bring $9.8 billion in overseas cash to the United States.

Earlier this year, Medtronic completed a tax inversion deal that relocated the company headquarters from Minnesota to Ireland, a company with much lower corporate taxes than those in the U.S. The extra cash could help Medtronic fund more acquisitions, Med Device Online reports.

In a tax inversion deal, a corporation relocates its legal domicile to a lower-tax country, usually retaining material operations in its higher-tax country of origin. The Wall Street Journal reports that Medtronic's $500 million tax payment represents only a 5 percent charge on the $9.8 billion cash and investments it is bringing back to the U.S. Medtronic would have had to pay 35 percent income tax if it had remained headquartered in Minnesota—this difference amounts to about $3.4 billion in tax savings under the new corporate structure. Fernando Vivanco, a Medtronic spokesperson, confirmed to the WSJ that Medtronic is "paying about $500 million in taxes to the U.S. Treasury to allow us to use these dollars in the U.S."

In a filing with the Securities and Exchange Commission (SEC), Medtronic indicated that the restructuring of some Covidien businesses "provides Medtronic with additional financial flexibility and increased confidence in the Company's ability to meet its financial commitments, which include continuing to target an "A" credit profile through a reduction in its debt to EBITDA ratio by the end of fiscal year 2018," according to Med Device Online.

Before the Covidien merger closed, Medtronic CEO Omar Ishrak, attempting to deflect public criticism and regulatory scrutiny of the deal, contended that the tax savings would give Medtronic the flexibility to re-invest in the U.S. and create jobs here. After the deal closed, Ishrak told analysts that the new company would look for U.S.-based companies with early-stage technologies that would help Medtronic increase its product pipeline. "So the M&A activity from us, certainly from a technology perspective, is very sort of close to what we're focusing on. Bigger deals, obviously opportunistically, we'll look at it, but that's a matter of our overall financial bandwidth and our management bandwidth," Ishrak said during a conference call, according to Med Device Online.

Because of this deal, Medtronic could become more aggressive in its merger and acquisition activities. Even before freeing up the new billions in cash, Medtronic had made a number of smaller acquisitions worth at least $688 million, the Minneapolis Star Tribune reports. One of the recent Medtronic acquisitions is Lazarus Effect, a company with more than 15 innovative vascular medical devices. Medtronic acquired Lazarus Effect in a $100 million cash deal, its eighth acquisition since the Covidien merger in January, Med Device Online reports.

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