Invasion, inversion and tax aversion!

        =  Big $aving$

I read of an extremely exciting deal for Ireland-based medtech company Covidien this week, who have been acquired by the giant Medtronic for a staggering (to me, anyway!) $42.9B - yes, that is billions - with a capital B! As far as I am aware, this is the biggest medtech transaction in history. Being acquired by a giant for an equally giant price is the dream of almost every start-up, but this type of deal not only raises eyebrows due to one fundamental reason for the (price of) acquisition, but also raises questions for entrepreneurs about where one should start up one's start-up!

Of course I am referring to the sweetheart part of the deal for Medtronic, which comes down to a term called "inversion", whereby one company buys (or merges with) another that is based in a country with a significantly lower tax rate, thus lowering corporate taxes to a significant enough level that one is even willing to pay an inflated price to get the other. It's not that much different from the various English rock stars who developed a sudden taste to be at least pseudo-Irish and go live there, so they could take advantage of the heretofore extremely favourable treatment by Ireland of artists, in terms of taxes. 

While such tactics remain perfectly legal in the corporate world, legislators in both the EU and US have had their feathers ruffled over such shenanigans in recent years, not least due to the scandals arising out of them, typified by the national outrage in the UK over the fact that Starbucks (among other giants such as Amazon and even Facebook) had paid virtually no taxes to the UK in essentially a decade. Since its introduction into the UK about 15 years ago, Starbucks had reputedly paid a mere £8M in taxes (by late 2012) despite sales of over £3B, and it had apparently paid no tax at all since 2009!

Similar stories have appeared for Amazon in the UK, where, in a recent tax year, the company paid a total of nothing in taxes to Her Majesty, while raking in sales of DVDs, CDs, and books to the tune of some £3B, all due to registering their European HQ in tax shelter Luxembourg. Ditto social media behemoth, Facebook, who with a cosy Republic of Ireland HQ in Europe, managed to pay barely a quarter of a million pounds in taxes in a recent year, alongside reported sales of some £20M, and with estimated advertising revenue soaring as high as almost £300M. 

It's all very good for business, as the numbers above, alone, indeed show. For a giant medtech company like Medtronic, it undoubtedly makes solid business sense in that they get to expand their offering to an already considerable client base, while coincidentally managing to lower costs. But you can see why lawmakers bristle at these manoeuvres, especially if in this case you are an American lawmaker and you see all those juicy tax dollars being whisked off to Ireland where a large part of them thence becomes actual profit. 

This despite the fact that Medtronic will continue to have its de facto operational HQ in Minnesota, employing several thousand, while the corporate offices are at least theoretically based in Ireland. It's a ploy, if not an outright play, and similar reasons undoubtedly lay behind the failed attempt recently of Pfizer to take over UK-based Astra Zeneca. You can't blame people for trying, but there has to be value for the targeted country also in any inversion move, and the UK as a nation seemed opposed to this particular play by Pfizer. 

Unquestionably, consolidation is an inevitability in the booming orthopedics segment, due both to various entities being keen to scale their operations, as well as a changing and challenging healthcare system in the US. There have been similar deals by other big players of late, and that includes Zimmer's acquisition of Biomet and Stryker having done a number of deals, including their swallowing of Small Bone Innovations just this past week (for $375M).  Experts in the space have been clear that the economics will work better when there only a few big guns delivering the entire orthopedics market needs directly into the hands of surgeons and hospitals.

Ireland is not the only option available for such an inverse move and in fact Canada was in the news in the past week with the merge of Vancouver's linchpin biotech QLT with Pennsylvania-based Auxilium Pharmaceuticals, creating an offshoot entity to be called New Auxilium. There is little argument over the fact that a lower corporate tax rate was a heavy duty factor in this merge, on top of improved exposure to the Canadian marketplace for Auxilium. 

So, where you decide to start up your start-up could actually eventually play a part in how attractive a deal may be to a party resident in the US, in terms of them deriving greater value in such a deal via tax-based synergies. It's not a trivial point and it is currently driving some very big deals indeed, as this deal between orthopedic giant Medtronic and Covidien clearly shows.

At AmorChem, we are more than happy to see the burgeoning global orthopedics market (estimated to be not far off $50B) continue to evolve via such a vigorously active deal space, not least because we are co-developing a porous titanium compression screw that would insert very snugly into the portfolio of any expanding orthopedics enterprise - big or small!

Now speaking of mergers and acquisitions, I need to acquire a fresh mug of this new Pharaoh's Perfection Morning Blend, and then merge deeply with the chaise longue under the sunny silver walnut tree. Until next time, that's it from me!