Medtronic has assured its investors, again, that moves by the U.S. Department of Treasure to block tax inversions will not have any material impact on it. Its latest statement is in response to temporary regulations on inversions and proposed regulations on earnings stripping that were released earlier this week by the Treasury Department.
This ongoing regulatory march already just sank the proposed merger of Pfizer and Allergan, which at $160 billion would have been the largest pharma deal ever.
The medical device giant made a similar statement last fall when the agency released guidelines making it more difficult for companies to undertake an inversion and reducing the associated economic benefits. One benefit of its $43 billion acquisition of Ireland-based Covidien that closed in January 2015 was to lower the company's effective tax rate between to 15.5% and 17.5%. That's down from a pre-merger rate of about 18% to 20%, the company said in a June earnings call.
At the time the merger was announced, Medtronic was expected to save as much as $3.5 billion to $4.2 billion in U.S. taxes due to the deal.
"Medtronic has concluded that the temporary and proposed regulations do not have a material financial impact on any transaction undertaken by the company," the company said in a statement issued on April 6. "Medtronic will continue to more fully examine the regulations and will provide appropriate disclosure concerning any potential material impact on the company, if applicable."
With its latest assurance, Medtronic ($MDT) seeks to calm any potential investor concerns that the temporary regulations on tax inversions, which involve the acquisition of a foreign company in order to minimize a U.S. corporate tax rate, and the proposed regulations on earnings stripping, the practice of minimizing U.S. taxes by paying deductible interest to a foreign parent or affiliate in a low-tax country.
Despite the fact that the deal closed more than a year ago, Medtronic remains heavily focused on financial engineering-heavy tactics such as squeezing out tax savings and cost synergies. It's looking for $300 million to $350 million in fiscal year 2016 synergies; its fiscal year ends at the close of April. Through fiscal 2018, it's looking for at least $850 million in cost savings.
Medtronic has staked out a not-too-ambitious claim for mid-single digit quarterly revenue growth--and it's also been taking heavy hits from the impacts of currency exchange. Significantly expanding revenue growth via innovation or major acquisitions seems to be only minimally on its radar. But it would take a lot to move the needle--the company is expected to have a whopping $28.8 billion in revenue this year, making it the largest revenue-generator in med tech.
Investors remained lukewarm to Medtronic's tax inversion protestations, with the stock largely flat after the April 4 statement from the U.S. Department of Treasury. It was up about 2% on April 6 in early trading after the company statement.
But investor indifference has largely been the recent stance toward Medtronic. Despite some ups and downs with broader market swings, Medtronic is largely flat since it closed the Covidien deal more than a year ago. That's a huge slowdown that predates the merger by only a few months--over the last 5 years its share price climbed a massive 85%.
- here is Medtronic's statement
- and here is the U.S. Department of Treasury announcement