FTC wants more data on Medtronic-Covidien deal, but analysts aren’t worried

Analyst report: Dems can't stop Medtronic-Covidien merger

The anti-inversion commotion in Washington, D.C., is "more bark than bite" and unlikely to turn into reform in time to damage Medtronic’s (NYSE:MDT) $43 billion deal with Covidien (NYSE:COV), according to analysts with Morgan Stanley.

Democrats have won support from the White House for efforts to penalize companies that relocate their corporate headquarters outside of the U.S. in order to benefit from lower tax rates, but Republicans won’t be so eager to play along, the analysts wrote.

"It remains unlikely that a legislative fix will be possible before the next presidential cycle, as Republicans are unlikely to agree to inversion reform without a broader overhaul of the corporate tax code, which in turn would likely be unpalatable for Democrats," according to analysts David Lewis and James Francescone. "This dynamic may be why Democrats have tried to enlist greater support from the White House and the Treasury. These recent hints of executive actions may have more bark than bite, as significant changes to transactional tax treatment may require statutory revisions beyond the rule-making discretion of the IRS or the Treasury."

That’s good news for the companies, which just revealed in a regulatory filing that the Federal Trade Commission has requested additional information and documentation related to the merger. The device makers don’t think the 2nd request will delay their deal, which is expected to close late in Q4 2014 or early in 2015.

Democrats on Capitol Hill have come out against deals like Medtronic’s that use acquisitions of overseas companies to shift their official headquarters to countries with more favorable tax rates. Various measures have attempted to prohibit so-called ‘corporate inversions’ and to ban inverters from bidding for or winning federal contracts.

Medtronic and Covidien have maintained that their merger isn’t motivated by the inversion, saying that the main drivers are strategic. Morgan Stanley analysts agreed, maintaining that "cash access" is the primary concern for the merger.

"The real purpose of this, in the end, is strategic, both in the intermediate term and the long term," Ishrak told reporters earlier this year. "It is good for the U.S. in that we will make more investment in U.S. technologies, which previously we could not."

The merger will allow Medtronic to tap the billions currently stored outside the U.S. without having to pay U.S. corporate taxes upon repatriation. Covidien moved its headquarters to Ireland in 2009, saying at the time that the company hoped to benefit from the lower corporate tax rate there. Medtronic plans to make the same move once the merger closes later this year or early in 2015.

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