Shareholders Approve Medtronic Deal to Buy Covidien

MINNEAPOLIS (Minneapolis Star Tribune/TNS) -

Shareholders approved Medtronic Inc.’s $48 billion takeover of Covidien PLC Tuesday, though sour feelings remained among some who voted in person on the deal that will move the company’s headquarters from Minnesota to Ireland.

The owners of 75.2 percent of Medtronic’s billion or so outstanding shares voted in favor of the acquisition following six months of public debate over the deal. Longtime shareholders were upset about having to pay an unplanned capital-gains tax, but the market has sent Medtronic shares up 18 percent since the deal was announced June 15.

“We looked at the broader interests of all our stakeholders, of all shareholders around the world, the individual as well as institutional, of government and regulatory authorities, of patients, customers. And as a whole, in our judgment, we felt that this was the best way to structure the company,” Medtronic Chief Executive Omar Ishrak on Tuesday told the crowd of about 100 shareholders who had gathered in a Minneapolis hotel conference room to vote in person.

But most shareholders voted electronically or by mail, and most voted in favor of the deal. With approval from the company’s owners, Medtronic will seek a final green light from the Irish High Court, which could take several weeks. Company officials hope to close the deal before the first week of February.

Medtronic is paying $35.19 per share and exchanging each Covidien share for 0.956 shares in the new company, which will be called Medtronic PLC. Although originally announced with a $42.9 billion price tag, the value of the deal has risen along with Medtronic’s share prices. On Tuesday, Medtronic dropped half a percentage point to $71.22 a share, while Covidien dropped 0.2 percent to $102.08 per share.

Wounded state pride featured in Tuesday’s comments from critics, who said Medtronic has been one of Minnesota’s most reliable employers and investments since the company’s storied founding in a northeast Minneapolis garage 65 years ago. The naysayers were not placated by explanations that the company will keep its executive offices in Minnesota and invest more in the state than it could before the deal.

“Medtronic’s turned their backs on shareholders, the United States, the state of Minnesota,” said John Hilger, who voted against the deal. “Here you’ve got your typical company that started up in a garage. And now? Boom. It’s just not fair.”

Several shareholders also criticized the company for what they saw as a calculated corporate decision to avoid taxes by moving more operations overseas, placing more company revenue out of reach of the Internal Revenue Service. At a little-noticed meeting Friday, the State Board of Investment decided not to vote its shares in part because the deal is structured as a “tax-avoidance transaction” that state officials have traditionally not supported, according to comments at the meeting from Minnesota Deputy Attorney General Christie Eller.

Ishrak, who will remain top executive at the combined company, repeated a comment Tuesday that he has made many times before: that the Medtronic-Covidien tie-up is motivated by a desire to reach more patients and grow a stronger business — not because of tax savings.

He did acknowledge that Medtronic has amassed some $13.5 billion in cash in overseas accounts, and in the past, company officials have said the money would be subject to at least $3.5 billion in “repatriation” taxes if brought back home. But company officials don’t see that as avoiding taxes, since they never intended to pay the money, but as a strategy to most effectively invest the money in the U.S.

“It is a matter of access to cash that we want to invest in the U.S., in Minnesota,” Ishrak said. “We have committed to deploying 1,000 more people in Minnesota over the next five years. We have committed to taking $10 billion in cash which otherwise we would not have access to, to invest it in the U.S. for med-tech purposes. For growing med-tech in Minnesota. We feel that is the right thing for our shareholders, it is the right thing for the U.S. in our perspective, and the right thing to do.”

Changes to U.S. tax rules announced last fall will prevent Medtronic from loaning the overseas-held cash to subsidiaries to buy Covidien. That forced Medtronic to instead borrow $16 billion, in the biggest U.S. corporate commercial bond issue of 2014, to fund the deal.

“The real focal point is access to that $13.5 billion that they have O.U.S.,” or outside the U.S., said Dave Runkle, an owner of several thousand Medtronic shares. “Every company has access to the cash they hold outside the U.S. if they pay the repatriation tax. They don’t want to do that.”

Shareholder David Shore said he voted in favor of the deal because it’s the right thing to do for the stock, which will grow in price over time and eventually benefit long-term holders.

He said he agrees with the decision not to repatriate Medtronic’s overseas cash. “To take $14 billion and have a third of that go to the federal government, just to make the government bigger, that is not right,” he said.

The deal was approved by Covidien shareholders in a meeting on the other side of the Atlantic just hours before the Medtronic votes were tallied.

The move will shave a couple of percentage points off Medtronic’s corporate-tax rate while providing more tax flexibility for future revenue.