As part of an internal restructuring related to its $49.9 billion merger with Covidien, Medtronic will pay a one-time tax charge of $500 million so that it can bring $9.8 billion in overseas cash to the United States.
This move is the result of the tax inversion deal that relocated Medtronic from Minnesota to Ireland, where corporate taxes are much lower. Medtronic could use the extra cash to fund more acquisitions, Med Device Online reports.
A tax inversion deal is the relocation of a corporation’s legal domicile to a lower-tax nation, usually while retaining material operations in its higher-tax country of origin. According to the Wall Street Journal, Medtronic’s U.S. 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. The difference in payments amounts to approximately $3.4 billion in tax savings under Medtronic’s new corporate structure. Medtronic spokesperson Fernando Vivanco 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.”
A filing with the Securities and Exchange Commission (SEC) indicates that the company’s restructuring of certain 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 close of the merger, Medtronic CEO Omar Ishrak attempted to deflect public criticism and regulatory scrutiny of the tax inversion deal by arguing 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 to U.S.-based companies with early-stage technologies to beef up Medtronic’s 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.
The deal could result in Medtronic becoming more aggressive in its merger and acquisition activities. Even before the restructuring freed up billions in cash, Medtronic, since June, had made smaller acquisitions worth at least $688 million, the Minneapolis Star Tribune reported. Medtronic recently acquired Lazarus Effect in a $100 million cash deal, its eighth acquisition since the Covidien merger in January, Med Device Online reports.