The U.S. Treasury Department announced new regulations earlier this week to discourage companies from moving their headquarters overseas through tax-inversion deals, including Medtronic's plan to move headquarters to Ireland after finishing their acquisition of Covidien, according to the Minneapolis/St. Paul Business Journal.
Medtronic announced plans to acquire Covidien for $43 billion this past summer and expects the deal to close in late 2014 or early 2015. The company announced plans to move headquarters the same day, and has been under fire ever since. Medtronic isn't the first medical device giant to attempt this type of tax inversion strategy — others have tried with varying degrees of success — and some in the industry are watching closely for an opportunity to make a similar move.
The new proposed rules would impose additional financing costs on companies that move their headquarters overseas after an acquisition. The regulation also targets "hopscotch" loans allowing businesses use cash from overseas in the United States without paying federal taxes on it, according to the report.
Here are three ways the proposed regulations could impact Medtronic's acquisition:
1. The acquisition would become more expensive with the additional financing costs.
2. Medtronic wouldn't be able to finance the acquisition with overseas cash. One alternative would be to raise debt to fund the deal.
3. Medtronic could possibly pull out of the deal if the rules are changed, according to the terms of their agreement. However, it's unclear whether these regulations would trigger the opportunity to pull out of the deal without a fine.
The day after these new regulations were proposed, Medtronic shares were down 4 percent, according to a Nasdaq report. There has been activity in the option market with more than 7,500 October 61.50 puts were sold for $0.68 and "volume dwarfed open interest of 49 contracts, which indicates that a new position was implemented."
Some shareholders are unhappy with the deal and have sued to prevent it, but the company is moving forward with the acquisition. The company plans to cover CEO Omar Ishrak's $24.8 million tax bill, and millions more for other executives, as a result of the transaction. This further fuels the fire for some angry investors who argue they won't benefit from the move.
Mr. Ishrak has argued on the contrary — that the acquisition is good for shareholders and the U.S. economy. The company has a strategy for future growth, including returning 50 percent of the free cash flow to shareholders; to achieve their goals, the company will focus on therapy innovation, globalization and economic value. "We believe the Covidien acquisition will accelerate these strategies, bolstering our long term market competitiveness as well as the sustainability and consistency of our financial performance," Mr. Ishrak said.
The company's tax rate on global income would fall around 2 percent, but Medtronic would still pay federal, state and local income tax on United States earnings, Social Security taxes, property taxes and the medical device tax. Mr. Ishrak also announced the company plans to invest billions into research and innovation in the United States, creating more than 1,000 jobs in Minnesota as well.
So, could the federal government stop all this with the new regulations?
Likely not, say the experts, but it would make the already expensive and complicated deal even more complex.