Inverting Value

Tax-inversion is on the rise. What is it?

The latest health-care merger highlights the practice of tax-inversion. If Medtronic—based in Minneapolis—buys Covidian—domiciled in Dublin—Medtronic will shift its home-address from the US to Ireland. That will lower the company’s statutory tax rate from 35 to 12 ½ percent.

The deal isn’t only about taxes: both companies make and market medical implants like pacemakers and stents. Joining forces would allow them to enjoy economies of scale. But the tax benefits sure help. Ireland’s extensive tax-treaties with the United States and European Union would allow the company to distribute more of its combined cash-flow to shareholders without paying a penalty.

This merger wouldn’t be the first tax-inversion deal. Since 1993, dozens of firms have shifted their domicile. On average, these companies have outperformed. The lower rate gives the new company a lot more flexibility. In Medtronic’s case, they estimate they will save some $850 million in taxes annually on a combined $7.3 billion in cashflow—a significant gain to the bottom line.

Some say Congress should prohibit such inversion deals. But that probably won’t work. Corporate officers have a fiduciary duty to maximize shareholder return. The US tax code needs reform. If Congress doesn’t fix it, more companies will just invert their taxes away.

Douglas R. Tengdin, CFA

Chief Investment Officer

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