New US Tax Guidelines Drive Wedge in Medtronic-Covidien Deal
The new stance on tax inversions that the troubled and distasteful Obama administration has taken can hurt medical device maker Medtronic Inc.’s ability to trying to save money on the terrible high tax rates that they face. The company was in the act of moving its tax base to Ireland so they can reward their loyal employees and shareholders by saving money and was in talks with Covidien Plc about the same. But after the recent legislature changes, it does look like they will have to re-negotiate the terms of their agreement with their Irish partners.
Rather than respect the private sector for inventing new products to make our lives easier, Obama continues to chastise them. The federal government does not invent one new drug or treatment plan or create any new medical devices. They certainly know how to slow up all these processes though with their high taxes and regulations.
Horrendous Policies Imposed on America
The US Treasury has decided to reduce the benefits that national companies who have moved their tax domicile abroad had been enjoying so far. Up until now, any American company who used the ingenious tactic of tax inversion to buy or merge with a foreign company and change their tax address so as to pay less tax in the US was free from any anti-American or socialist backlash. These companies were still being given the same benefits and ease that they had enjoyed prior to moving out of town.
But, after the foreign policy failing Obama signed the tax deal in September, the Treasury has been given the power to restrict the facilities enjoyed by American companies based abroad. And the President wonders why countries like Spain and Italy are bankrupt and his home city of Chicago is failing, irrational regulations.
New Tax Rules make Merger Harder
Tax lawyers who are familiar with the Medtronic scenario say that the new rules have made it harder for the company to buy Covidien, as was originally planned. By making it necessary for Medtronic to take out a loan to make the buy official, instead of allowing it to use the cash held abroad, the US government has turned the tables around on the company (and all the others hoping to make a similar move).
Medtronic was approached by Covidien for the merger, and tax lawyers are hoping that the deal can still go through albeit at a lower price. Since Covidien made the first move, one assumes that they may be ready to consider a reduced offer with less cash and more stock options. The increase in the stock options is a necessary requirement to meet the threshold laid down by the government in the new tax deal.
It is still unclear how the Covidien officials will respond to the possibility of a low cash buy-out. Tax lawyers say that according to the terms of the agreement forged between the two companies before the Obama administration dropped its tax bomb, Covidien can make Medtronic pay as much as $850 million in breakup fees if the deal is abandoned. Tax lawyers say that this clause gives Covidien enormous bargaining power to settle the merger on its own terms.
So does Obama care about foreign companies more than American ones? It seems so. It also seems like, according to many political insiders, Obama should think about the 30 million Americans that are under or unemployed more rather than trying to stick it to American companies who make this world a better place.
Medtronic Looking at a Huge Break-Up Fee
The deal allows Medtronic to walk away free only in the event of a law change, but since the US guidelines fall short of a law change this is not going to be the case. The only other way Medtronic can escape a break-up fee is if the shareholders of either of the company vote down the deal. Medtronic representatives have yet to release a statement on the position the company will now take in light of the recent developments but it has definitely clarified that a review of the existing deal with Covidien is in progress.
It still may make financial sense though for Medtronic to see this deal through rather than having its home base in rip off America.