Had it not been for a notorious American executive named L. Dennis Kozlowski, the merger deal that would move Medtronic’s headquarters to Ireland might not be happening. Pentair would likely still be an American company, too.
It was Kozlowski who helped provide what they both needed to be able to relocate to Europe to save money on taxes, and that’s a European merger partner. What they found, in each case, was an American-born, European corporate offspring of Kozlowski’s Tyco International — one of the most infamous tax dodgers in recent U.S. corporate history.
But corporate maneuvers to avoid U.S. taxes carry less stigma than they once did. The suddenly mainstream strategy of reincorporating abroad to beat the U.S. tax system now has solid corporate citizens like Pentair and Medtronic marrying the progeny of an executive like Kozlowski.
It’s been years since he’s made headlines, but Kozlowski is well worth remembering. He was that American archetype, a genuine up-from-modest-roots hustler who ended up being put in charge of an NYSE-listed company.
Once he became Tyco’s CEO in 1992, Kozlowski showed little interest in running a sleepy industrial company. Over the next 10 years, Tyco acquired hundreds of companies.
Assembling a mighty conglomerate, however, isn’t the only thing that made Kozlowski famous. There was also a $6,000 shower curtain that he charged to the company, along with a $15,000 dog umbrella stand and $2,900 in clothes hangers.
And then there was a $2.1 million 40th birthday party for his wife on the Mediterranean island of Sardinia that the company half paid for, an appallingly lurid affair that featured an ice sculpture of Michelangelo’s David urinating Stolichnaya vodka and a birthday cake in the shape of a woman’s body.
These kinds of details came out in court, when Kozlowski and former CFO Mark Swartz faced charges of looting Tyco of up to $600 million. They were convicted in June 2005, and Kozlowski only recently got out of jail.
The corporate scandal wasn’t what ended his career at Tyco, though. It was getting caught evading sales taxes on millions of dollars of art purchases. One of the things he was alleged to have done was ordering empty crates to be shipped from New York art galleries to his office in no-sales-tax New Hampshire while he took the paintings elsewhere.
The kind of guy who would do something like that isn’t likely to be all that happy seeing his company pay the full 35 percent U.S. corporate income tax rate, so it’s no surprise that Kozlowski in 1997 had used a corporate reverse merger with ADT to move Tyco to Bermuda.
Swartz boasted to a reporter in 2001 about saving $600 million in taxes that year through the relocation to Bermuda and other steps to avoid tax expense.
Bermuda did not turn out to be a great place long-term, however, and Kozlowski’s successor relocated Tyco to Switzerland.
Tyco by then had been split into pieces, with its medical products business now called Covidien and run from offices near Boston, even though it kept its European incorporation. And in 2011 what remained of Tyco was to be split again, including spinning off its business of building flow-control equipment.
Investment bankers from Deutsche Bank had already been pitching Pentair on the idea of buying Tyco’s flow-control business in a clever transaction known as a reverse Morris trust. It was the kind of strategic move that could transform Pentair, but it also meant a Swiss corporate home and a lower statutory tax rate for a company still run from Golden Valley.
Medtronic announced plans last month to pay $43 billion for Covidien, and the rationale was much the same.
Pentair and Medtronic won’t enjoy being linked with Kozlowski’s Tyco, of course, but they can’t call the issues of his era ancient history, either.
About a year ago, Tyco International disclosed that the Internal Revenue Service had decided that several of Tyco’s former U.S. subsidiaries collectively owed $883 million plus whopping penalties for having improperly deducted some expenses on tax returns from 1997 through 2000, and both Covidien and Pentair have disclosed they have a potential liability here.
The IRS appears to have gone after Tyco’s deduction of interest expense for intercompany loans made to subsidiaries that filed tax returns here. If the loans had been made to transfer earnings across the border to a low-tax place via loan interest, it’s apparently called earnings stripping. Tyco is disputing the IRS’ conclusion, but you’ve got to admit, it doesn’t sound that reputable.