From a legal and tax standpoint, Minnesota is losing an iconic business success story.
Medtronic, which started in a Minneapolis garage, has struck a $43 billion deal to buy an Ireland-based health care company. The combined firms will be headquartered in Ireland.
But that move across the Atlantic frees up billions of dollars the company will now invest in the United States.
Medtronic officials say the combination with Covidien was driven by the strategic fit between the two companies. Combined, the two firms will be able to offer hospitals and other customers everything from pacemakers and insulin pumps to brain scanners and surgical staples.
The company would be number one or two in six of 10 top hospital product lines.
"The strategic element of this deal is extremely important and that was the primary driver," Medtronic CEO Omar Ishrak said. "How these two companies fit, not only scale but also in terms of future introduction of future therapies."
Assuming the deal wins various approvals, the combined company would have its executive offices in Dublin. But company officials say their "operational headquarters" would be in the Twin Cities, where Medtronic employs more than 8,000 people.
Medtronic officials say the company plans to add 1,000 jobs in Minnesota in the next five years or so.
Joanne Wuensch, an analyst for BMO Capital Markets, said the deal is a no-brainier from a product standpoint and may give the combined firm more leverage in negotiating prices with hospitals and other customers.
"What these companies have been pushing for more and more is to provide a full product portfolio into the hospital," she said. "We believe that will provide for a more stable pricing environment, as well as therapy for patients a little bit easier and faster, given their product scale."
As a result of tax benefits and other savings from the deal, Medtronic said it would spend an additional $10 billion over the next decade on investments, acquisitions and research and development in the United States.
Ishrak said basing the company in Ireland allows Medtronic to put profits made overseas back to work in the United States without getting hit by high domestic corporate taxes.
Ireland taxes corporate income at 12.5 percent, compared with a top marginal rate of 39.6 percent in the United States, according to the tax advisory firm KPMG.
Companies that earn a profit abroad can face double taxation, first from the country where the profits were earned, and second by the United States if they move the proceeds back stateside. By legally relocating to Ireland, Medtronic avoids that second taxation.
"Maybe the irony of the whole transaction they have to for tax purposes move to Ireland to be able to better spend money in the U.S.," Brooks West is an analyst with the investment firm Piper Jaffray.
There's been growing concern among U.S. lawmakers about efforts by domestic companies to use mergers to reincorporate overseas for tax reasons.
Morningstar analyst Debbie Wang said companies may be feeling pressured to do these tax deals before Congress blocks them.
"We do think that the window on these types of tax-advantaged deals will be closing," Wang said. "We think that was probably a factor as Medtronic contemplated this opportunity."
Medical-device manufacturers also have been trying to broaden their product lines and rein in costs in response to price curbs forced by the nation's new health care law.
Wang sees the influence of the Affordable Care Act in this deal.
"By creating a way for Medtronic to offer all of these different items and work more closely with the hospitals, they're re now in a position where they can help to better engineer solutions that address these issues of costs, as well as improved care," she said.
Many believe the real problem is a federal tax code that's long overdue for an overhaul.
"Just like states in the United States compete for business by playing with their tax codes, countries all over the world, especially the industrialized ones, are playing with their tax codes to attract U.S. businesses," said Gordon Caplan, a mergers and acquisition attorney in New York. "And it seems to be working."
U.S. companies have an estimated $3 trillion in overseas profits they're leaving abroad because of high U.S. corporate taxes.
Medtronic's decision means it will no longer be a Minnesota company, but a legal entity of Ireland. That likely means Minnesota is losing, at least on paper, a Fortune 500 headquarters company. But its headquarters and largest concentration of employees remains in Minnesota.
Shareholders didn't completely embrace the deal, but Medtronic's share price closed down about one percent.
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