In an attempt to dodge the United States corporate tax rates, medical-device maker Medtronic has agreed to purchase fellow device maker Covidien, PLC for $42 Billion. These "tax inversion" tactics are used at many US companies and have become quite common within the healthcare industry in the past few years.
The attractiveness of these techniques are directly tied to the large amounts of cash that these companies hold abroad. The covidian deal is a prototypical example of the strategy in practice. Many of Covidien's executives live in Mansfield, MA which is the site of their U.S. headquarters and a corporate tax rate of 35%; they are, however, technically domiciled in Ireland where the corporate tax rate is 12.5%.
There is no doubt that consolidation in the healthcare industry is at a breakneck pace as this financial technique was seen last month when Pfizer offered AstraZeneca $117 Billion. With part of that cash coming from foreign profits Pfizer's goal was to lower it's average corporate tax rate thus increasing their margins and shareholder value.
This consolidation is not limited to major pharmaceutical companies, it is being seen in medium to large-cap hospital systems and larger medical specialty groups. As these companies grow larger due to this consolidation, thier negotiating power to deal with the likes of Pfizer and Medtronic grows immensely.
U.S. officials have indicated that they are looking in to these types of mergers more carefully so time will tell if the deals will continue.
By: Tommy King