Their stock prices may have taken a hit this week, but Medtronic (NYSE:MDT) and COV will likely be able to proceed with their $43 billion union under new U.S. Treasury rules announced this week governing inversion deals.
The U.S. Treasury Dept. moved Sept. 22 to stop inversion deals, looking to eliminate "certain techniques inverted companies currently use to gain tax-free access to the deferred earnings of a foreign subsidiary, significantly diminishing the ability of inverted companies to escape U.S. taxation."
That sent the stock of both companies on a downward spiral; MDT shares closed down 2.9% at $64.08 apiece yesterday and was trading at $64.21 per share as of about noon Eastern today, up 0.2%; COV shares closed down 2.5% at $88.11 apiece yesterday but had rebounded 2.5% to $90.35 per share as of about noon.
But Treasury’s new inversion rules, which puts a new tax on deferred foreign earnings and so-called "hopscotch" loans from foreign subsidiaries, are unlikely to scuttle the Medtronic-Covidien merger, experts say.
"Depending upon how it is interpreted, the Covidien/Medtronic acquisition should fall outside of the new 80% ownership rule, which adds additional restrictions and is likely to capture the most headlines as it is the easiest portion of this new rule to understand," wrote Benchmark Research analysts Jan Wald and Erica Layon. "We believe that the acquisition of Covidien by Medtronic makes good business sense for many reasons outside of the inversion benefits, and therefore think that it should fall outside of these new rules. Thus we continue to believe that the acquisition will go through as announced."
And Morgan Stanley analyst David Lewis wrote that the rules might make the deal more expensive but won’t kill it outright.
"Proposed Treasury rules on inversion could impose additional financing costs on Medtronic but do not appear to derail the transaction entirely," Lewis wrote. "At this point, renegotiating or restructuring the deal does not appear to be either required or likely," Lewis wrote. "The announced rule changes do not appear to satisfy the break clause in the merger agreement, which provides that either party can terminate the agreement without paying the $850 million break fee if tax changes would cause (the) new Medtronic to be treated as a U.S. corporation for federal tax purposes."
And Morningstar analyst Debbie Wang told the Minneapolis Star Tribune that the deal’s "strong strategic value" likely outweighs any negatives posed by the new inversion regulations.
"These new rules will not result in Medtronic plc being treated as a U.S. corporation which, as we understand it, is the only condition in the merger agreement that permits the ‘no fault’ abrogation of the deal," corporate tax adviser Robert Willens wrote in a note to clients Monday night, the newspaper reported. "These rules do not strike anything like a mortal blow."
For their parts, Medtronic and Covidien seem to be maintaining course.
"Both we and Medtronic are evaluating the intended changes. However, the combination of Medtronic and Covidien has always been primarily driven by the companies’ strategic decision to become the world’s premier medical technology and services company. Nothing that was announced yesterday changes that or impacts our commitment to moving forward and closing the transaction," Covidien chairman, president & CEO Joe Almeida wrote yesterday to his executive leadership team. "The companies are working closely together and are continuing with integration planning. We remain committed to communicating with you regarding the transaction. Please continue to raise any questions you may have regarding the transaction and feel free to share this note with your teams."