Twin Cities: Medtronic stock owners criticize deal, fearing tax hit

From TwinCities.com, August 22, 2014

Frustrated Medtronic shareholders on Thursday questioned a proposed acquisition that would relocate the Fridley-based company’s executive office to Ireland and sock some of them with possibly hefty capital gains tax bills.

“This is the least shareholder-friendly proposal I have ever seen,” Arthur Binger, 79, of Maple Grove said, drawing applause from a crowd gathered for Medtronic’s annual shareholder meeting in Mounds View.

In June, Medtronic announced a $42.9 billion acquisition of Dublin-based Covidien that is set to close late this year or in early 2015. During a lively question-and-answer session Thursday, chief executive officer Omar Ishrak argued the deal would create a medical technology giant that’s better positioned for global growth.

At one point, Ishrak seemed frustrated by the questions and told the crowd he would take only one more. When the comment elicited groans, Ishrak lightened the mood and got some laughs by saying: “OK, two more.”

He went on to take six more questions and ended the meeting on a sympathetic note.

“There is pain here, which I understand and I don’t deny,” Ishrak said. “All I can say is that, on balance, for the long-term value of the company, this is the right thing.”

The Covidien acquisition would create a holding company called Medtronic PLC. It would be based in Ireland, although the operational headquarters would remain in Fridley.

With the new structure, Medtronic says it would be able to invest more money in the United States without triggering taxes — particularly funds that Covidien currently generates from its overseas operations.

With the deal, Medtronic says it would expand its local workforce by 1,000 jobs in five years and invest $10 billion in 10 years in the United States.

But some shareholders Thursday questioned why Medtronic couldn’t have found a way to realize the strategic goals without creating a capital gains tax hit for shareholders.

Judy Mandile, 61, of Plymouth said shareholders who must sell stock to cover the taxes could lose 20 percent to 35 percent of their net worth, as well as their income. That’s because some long-term shareholders count on dividends from their Medtronic shares.

Patricia Hartlaub, 71, of New Brighton argued that the chance for long-term gains in the stock price is tough for many long-term shareholders to appreciate considering their age. She’s owned her shares for more than 30 years.

Such investors might not be around long enough to see the promised growth, but they would face a tax hit in the short-term that could force some to sell about a third of their shares.

“It’s a problem,” Hartlaub said.

In a line that drew chuckles from an audience that included many senior citizens, she said: “I think if you look out at the group of people here, as well as long-term stock holders — long term for us is short.”

The concerns of individual shareholders are unlikely to scuttle the Covidien deal, said Brooks West, an analyst with Piper Jaffray Co. in Minneapolis.

Institutional investors such as pension and mutual fund managers hold the vast majority of Medtronic shares, West said, and those investors are more concerned about what the Covidien deal means for Medtronic’s long-term growth prospects than the short-term tax hit.

“Institutional ownership is at about 86 percent,” he said. “I’m still believing that the deal is going to go through.”

But long-term individual investors are a relatively loud group in the Twin Cities because Medtronic has been a pillar in the local business community for decades.

The company was founded in a garage in northeast Minneapolis some 65 years ago, and currently employs about 8,000 in Minnesota.

One shareholder spoke on behalf of her 96-year-old father and said her family had owned Medtronic shares for more than 50 years.

“We have been the venture capitalists for Medtronic,” the woman said while questioning Ishrak. “When you look at all the facts, everyone here is going to have to sell shares. And it’s going to be millions and millions of dollars.”

The Covidien proposal has placed Medtronic in the middle of a national debate over tax policy. The company is one of several this year that has proposed a so-called “inversion” deal to move its headquarters abroad in response to high corporate taxes in the United States. In an inversion, a U.S. firm acquires a foreign company and incorporates overseas to take advantage of a lower tax rate.

While some shareholders on Thursday questioned the structure of the Covidien deal, others voiced sympathy with Medtronic’s tax challenges.

Longtime investor Jim Wychor, for example, asked Ishrak what shareholders could do to help overturn a tax on medical device manufacturers that’s part of the federal Affordable Care Act.

After the meeting, former Medtronic chief executive officer Bill George defended inversion deal, even though he has criticized similar moves by other companies.

Medtronic has about $14 billion in cash overseas. If the company brought that money back to the United States to make investments, about $4 billion would be lost to taxes, George said in an interview.

“I think this will free up a whole investment period over the next 10 years,” he said. “Tax inversions that are done for tax reasons only ultimately will fail, but … the tax rate of Medtronic is not going to change significantly after this deal is done. It’s the freeing up of the cash that’s very significant.”

Ishrak also tried to differentiate Medtronic’s motives from other companies that are trying to move their headquarters outside of the United States.

“We’re not going to pay any less tax in the U.S. after the transaction than before,” he said.

Medtronic officials argue that the merger will create a company that’s one of the world’s largest suppliers of medical devices and products used by hospitals and clinics. The size should drive more innovation, company officials say, and products that help control rising health care costs.

“Over time, the up-side potential for the stock and the company is tremendous,” Ishrak said. “It’s a transformative move.”