Medtronic deal could sting for long-time shareholders

Many longtime shareholders will face big tax bills after the company’s Covidien purchase.

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Medtronic Inc. signage is displayed at the company's office in Toronto, Ontario, Canada, on Wednesday, Aug. 31, 2011. Metronic Inc, the world's largest medical technology company, develops therapeutic and diagnostic medical products. Photographer: Brent Lewin/Bloomberg

Photo: Brent Lewin, Bloomberg

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Bloomington retiree Jim Furber considers Medtronic Inc. a great asset to the state and says he’s thankful for the company’s growth and stock appreciation over the years.

But like many Minnesotans who proudly invested in the homegrown company years ago, the former manufacturer’s rep feels blindsided by an unexpected tax bill from Medtronic’s proposed $42.9 billion takeover of Covidien PLC. Furber and his wife estimate they’ll shoulder a tax bill of up to $15,000 when they exchange their Medtronic stock for shares in the new Ireland-based Medtronic.

“Would we remain shareholders? That’s a big question mark in my mind,” Furber said. “I think on this they really kind of screwed up.”

“I’d vote against it if it I thought it would help.”

The proposal to merge with Dublin-based Covidien and drop anchor in lower-tax Ireland is stunning enough for Minnesotans, but the “taxable event” has sent longtime shareholders scrambling to financial planners, accountants and lawyers to determine the best move to preserve retirements and manage monthly finances. Many are bitter about having to do so.

Medtronic, blanketed by calls and e-mails from investors and employees concerned about their tax obligations, has insisted that the move will be good for shareholders in the long run. All the freed-up cash means the company can reinvest more aggressively and accelerate earnings, so the argument goes. Since Covidien’s headquarters is in Ireland, “the most financially efficient structure was to incorporate the new company there,” company spokesman Fernando Vivanco said.

When asked whether the company fully considered the deal’s impact on its longtime shareholders, Vivanco said the taxable event was “flagged” in all its communications since the June 15 announcement.

“The implications on an individual-by-individual basis will vary significantly,” Vivanco said.

For investors like Furber, it’s a tough pill to swallow.

Some express resignation, saying Medtronic is only doing what many other U.S. companies have done to free up billions of dollars that would be stuck overseas to avoid high U.S. corporate income taxes. The country’s 35 percent corporate tax rate is the highest in the world; Ireland’s is 12.5 percent.

That’s the core problem, said retired Medtronic executive Dale Wahlstrom, former CEO of industry group LifeScience Alley. Wahlstrom says he’d prefer to remain invested in the new Medtronic but still doesn’t know if that’s the right move for him.

“We’re all talking to our tax people and attorneys,” Wahlstrom said.

The tax hit at issue affects individual shareholders of Medtronic and Covidien, primarily those who hold stock outside of a retirement plan and who bought it when the stock was really cheap. People with Medtronic stock in tax-deferred accounts — such as IRAs, profit-sharing plans and 401(k)s — are not affected until they start drawing funds from the accounts. The unvested, restricted stock and unexercised stock options that Medtronic employees have are also not affected, Medtronic said.

To address the tax implications for its workers, Medtronic is holding eight conference calls starting Sunday.

For some of those affected, the tax obligation feels deeply unfair.

“The word I would use is disgusted,” said Richard Cohen, a retired Twin Cities stockbroker and decades-long Medtronic investor. “It’s clear to me that this company couldn’t care less about the individual shareholder.”

Long history

The repair shop that Earl Bakken and his brother-in-law Palmer Hermundslie started in Hermundslie’s northeast Minneapolis garage (a structure reportedly made out of two railway boxcars) in 1949 eventually made history with its cardiac pacemaker. Minnesotans know the story well. Medtronic took on corporate rock-star status, the brightest in the constellation of medical companies that emerged in the Twin Cities.

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