Medtronic (NYSE:MDT) CEO Omar Ishrak today sought to spread oil on the waters of controversy surrounding Medtronic’s proposed $43 billion merger with Covidien (NYSE:COV), telling employees that the companies are well along in their integration planning and working to educate legislators and the public on the pending union’s rationale.
One aspect of the deal, a so-called tax inversion, would see Medtronic shift its corporate domicile from the U.S. to Covidien’s base in Ireland, thereby lowering Medtronic’s overall tax burden and freeing up cash generated overseas. That has raised hackles among both Republicans and Democrats, with the former using it to advocate for corporate tax reform and the latter seeking to ban inversions outright.
That noise prompted at least 1 report today that the companies would seek to alter the deal if Congress acts to change the laws around inversions. But writing today in a memo to employees, Ishrak said Medtronic and Covidien deliberately chose the inversion structure because it "provides the best way to ensure our long-term ability to invest in growth and innovation."
"Indeed, the new structure will allow us to invest an additional $10 billion in areas such as early-stage venture capital investments, acquisitions, and R&D in the U.S., above and beyond Medtronic’s and Covidien’s existing plans," Ishrak wrote, according to a regulatory filing.
Although perfectly legal and "increasingly common," the inversion’s controversy came as no surprise, he added.
"We knew full well when we entered into the agreement utilizing this structure that it had the potential to generate this type of discussion and media coverage. And, we knew that the announcement of our deal, as well as other inversion transactions, could lead some people to a push for legislation to change the law. We elected to proceed because, under current law, this is the best transaction structure to allow us to meet both our strategic and financial goals and we believe that common sense will prevail," Ishrak wrote. "We continue to monitor proposed legislative efforts and the possibility of administrative actions by the Dept. of Treasury. We know the ensuing months include an election campaign in the U.S. that may keep this issue in the public eye. Rest assured we will continue doing all we can to convey the true strategic rationale of this deal to media and others. And, we will continue to work with government officials so they understand the strong business strategy and resulting benefits to the U.S. economy of our proposed transaction."
Covidien and Medtronic are moving "aggressively" to plan the integration, with Medtronic’s Geoff Martha and Covidien’s Bill Burke filling out the integration team, the CEO wrote, noting that approval of the deal has been sought from governments around the world.
"We are pleased with our progress to date and continue to be confident that we will secure these approvals and close our transaction in the fourth calendar quarter of 2014 or early 2015," Ishrak wrote. "In short, the integration planning with Covidien is off to a strong start, and we should all be extremely excited about the future of what we can do together to transform healthcare."
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