Returning to Berlin for the first time in several years, it is remarkable to see this great city progress as the cultural center of Germany. Penny and I had the privilege of staying at the magnificent Adlon Hotel as our hotel room looked out on Brandenburg Gate, the former dividing line between East and West Berlin. I still have vivid memories of standing under the gate on October 3, 1990 – the day of German reunification – when Maestro Leonard Bernstein conducted the Berlin Philharmonic playing Beethoven’s 9th Symphony with its glorious “Ode to Joy.”
Some thoughts on our impressions of Berlin circa 2014:
- I wish I could have been here on Sunday, July 13 for the spectacular triumph of the German soccer team as 250,000 Germans watching on large screens on Unter Den Linden saw young Mario Götze’s brilliant goal in the 113th minute to bring the World Cup back to Germany.
- Two days later 400,000 Germans gathered to greet their heroes as the team arrived home from Rio. Prior to landing at Berlin’s Tegel airport, their airplane did a flyover and wiggled its wings to salute the cheering masses. What a contrast with the 1930s ...
- Speaking of the 1930s, German contrition and ownership of the terrors of the past are present everywhere, but no more apparent than at the stunning and horrifying Topography of Terror. This museum documents the shame of the past without pulling any punches. Just one block from Brandenburg Gate is the haunting Holocaust Memorial, with its images of large blocks protruding from the grounds (representing those who died in the Holocaust?). As horrifying as these monuments are, one has to credit the German people for owning the sins of their past. Where in the U.S. can one find an owning of our past of destroying Native American cultures (or attempting to do so) or bringing slaves to our shores in chains? Or in Russia of the 25 million people “eliminated” by Joseph Stalin?
- These monuments constitute but a small fraction of the architectural wonders of Berlin, as many of the world’s greatest architects have come here with the freedom to showcase their greatest creations – not the least of which is amazing Sony center. Berlin today is a modern, beautiful city that all Germans can be proud to call their capitol.
- I have long admired the German economic miracle which has occurred since the rapprochement in the past decade, thanks to the leadership of former Chancellor Gerhard Schröder. He brought together business, labor and government leaders to act in concert to build the German economy. The result of their efforts has been years of improved competitiveness, thanks to highly skilled workers, flat wages and benefits, low inflation, and net exports exceeding $200 billion – a sharp contrast to the U.S.
- Now there are cracks appearing in the vaunted German resolve, as wages are rising again at 3-4%, well above Germany’s low inflation rate of 1%, and German industry finds itself far too dependent on Russian gas that costs three times the price paid by its U.S. counterparts. Meanwhile, a rift is emerging between complacent German politicians and German industrial CEOs forced to expand outside Germany in order to remain competitive. How will Germany resolve these differences? We left Berlin without any clear answers to this question, in spite of asking many leaders to respond to it. One hopes that Germany will continue to be not only the leader of Europe, but a role model for all industrial nations, including the U.S.
- Meanwhile, one of the weaknesses of the German economy – the lack of entrepreneurship and risk-taking – does not appear to be any closer to resolution than it was a decade ago. Time and again, we were told of the fear of failure that so many German leaders have and their unwillingness to embrace the kind of innovation so commonly seen in Silicon Valley due to the personal risks involved.
While Germany has its share of challenges, they pale by comparison with the political gridlock we face in the U.S. I have the clear sense that the diligence, commitment, and pragmatism of Germany’s business, government and labor leaders, and the strong sense of unity among them, will enable Germany to resolve the issues it faces, and continue to be a strong, competitive player on the world scene – and a role model for all developed economies.
On Sunday, Germany became the champion of the soccer world, winning the World Cup for the 4th time, defeating a rugged Argentina team with Lionel Messi as its star. Germany’s surge through the tournament – undefeated in seven games with only a tie with Ghana marring its record – wasn’t a fluke, nor was it lucky. It was the result of 14-year rebuilding program that began in 2000 when soccer was at a low point in Germany’s vaunted history.
In 2000, Germany had been embarrassed by being ousted in the group stage of the European Cup, finishing in 14th place. Its aging greats were retiring and no young stars were emerging. When Coach Erich Ribbeck resigned, the German Federation decided it needed to overhaul its entire player development system. It took 14 years for these decisions to pay off fully. On Sunday Germany’s dreams were fulfilled, thanks to 22-year-old Mario Götze’s brilliant goal in overtime, assisted by 23-year-old André Schürrle, both of whom entered the game as substitutes.
Here are five lessons that business leaders can learn from the German soccer experience that apply to running your business.
#1 - The team is more important than any individual. This maxim was evident throughout the tournament as Germany prevailed over such extraordinary individuals as Lionel Messi and Cristiano Ronaldo, holding both scoreless. The German victory was definitely a team effort, thanks to the coaching of Joachim Löw, who took over in 2006. Germany was such a well-unified team that FIFA could not single out one player as MVP, so it gave the award to a disappointed Lionel Messi. Is your organization truly a team effort, with the leader as coach, not director, or is it directed from the top? If the latter, you will never get the best efforts from your teammates or enable them to develop fully.
#2 – Develop a broadly-based cadre of emerging stars for the long-term. Germany’s youth movement was launched by former star Jürgen Klinsmann, now coach of the U.S. national team, when he became coach in 2004. It has been carried on by his former assistant and now head coach, Joachim Löw, for the past 8 years. They deserve credit for producing such great players as Thomas Müller (24), Mesut Özil (25), Toni Kroos (25), Jérôme Boateng (25), Mats Hummels (25), and Benedikt Höwedes (26) as well as Götze and Schürrle. Business leaders need to think less about immediate succession plans and more about long-term development of outstanding future leaders. That takes intense work with young leaders in their twenties and thirties who will have the breadth and depth of leadership experiences to be prepared for top-level assignments.
#3 - Rely on your veterans, but give emerging stars their chance to shine. Unlike Klinsmann who dropped Landon Donovan, America’s all-time leading scorer at age 32, Löw moved 36-year-old Miroslav Klose, Germany’s all-time leading scorer into the starting lineup, for the final two games. He responded with the winning goal against Brazil, making him the leading goal scorer in World Cup history. Yet when Germany desperately needed a goal with the clock ticking down, Löw called on young Götze, who responded with the goal that won the Cup. All too often, business leaders fail to take risks on their best young leaders by giving them the big opportunity to step up in the most challenging situations. An exception is former Novartis CEO Dan Vasella, who promoted two leaders in their thirties to run the company’s most challenging divisions.
#4 – As the coach, position your players in their “sweet spot” on the field. The key to leading a business organization or team is very similar to soccer: the leader needs to ensure that the players are positioned on the field in their optimal positions, where their strengths can be maximized and their weaknesses not exposed. That’s what Germany’s Löw did in starting three forwards, while keeping his rock-solid defenders in place. Midway through the tournament he made a key tactical move to get Captain Philipp Lahm back to his “sweet spot” at left defense, moving Bastian Schweinsteiger to center midfield, which strengthened both positions. Business leaders need to ensure they get their key leaders into the right positions so their strengths can be fully utilized.
#5 – You’re building for the long-term, but you must win today’s game. Business leaders often complain about the pressures of quarterly earnings reports while they are investing for the long-term. Every great soccer coach knows you have to win today’s game to have a shot at building for the long-term. As well as Germany has done in developing its cadre of talented players, it still had to beat Argentina to establish its success. Had it lost in a shootout, I doubt everyone would be hailing German soccer today. It’s the same for companies: performance matters. But the key is not to win a single tournament or have a great year; it’s to sustain that performance year-after-year. As in soccer, that’s hard to do with new competitors constantly nipping at your heels. Most important of all, it is essential to invest in your people for the long-term, and to know how to use an aging star like Klose and when to trust a young star like Götze.
From Vail Daily, July 14, 2014
“The mountains are calling and I must go,” wrote naturalist and writer John Muir.
And the mountains called and the people came, despite showers and reverberating thunder, to celebrate Walking Mountains Science Center at the Reach for the Peak award dinner held on Thursday at the school’s campus in Avon. “Nature Nurtures” was the theme, and several stations were set up with experiential learning for the guests on meditation, local plants as aromatherapy and healing plants.
Penny and Bill George were the honorees. Through the support of the George Family Foundation over the past eight years, the school built a state-of-the-art educational facility, the George Meadow Learning Center.
Penny’s passion is in transforming medicine with a holistic approach focusing on the integration of mind, body and spirit. She has started programs, including the Penny George Institute for Health and Healing in Minneapolis. Bill has led several companies, including Litton Industries, Honeywell and Medtronic. He is passionate about leadership, has published several books on leadership and is a professor of management practice at Harvard Business School. They believe in giving back to the communities where they live and visit.
“It’s very important that the students of the valley and those from out of state have an appreciation for the environment,” said Bill George. “Without the young people learning about our land, there may be no environment in the future.”
Penny concurred. “Everyone needs a chance to experience what nature is all about,” she said. “The children will be running the valley. It’s important they have a sense of place of here.”
Originally founded in 1998 by Kim Langmaid, Walking Mountains took root in the county as Gore Range Natural Science School in a small building in Red Cliff. The magnificent campus, which opened in 2011 is located in a pristine setting north of Interstate 70 in Avon on land donated by the Tang family. Not only the county’s school children but also adults and visitors benefit annually from their many programs including the STEM Leadership Academy, programs for graduate students, nature hikes, winter snowshoes and much more.
Nancy Ricca, who splits time between New Jersey and Vail, was drawn to Walking Mountains early in her Vail residence.
“There are a lot places to put your dollars in the valley, but this is one organization that lines up what I love: hiking, nature and learning. Walking Mountains puts me in touch with the reason I came here in the first place.”
Alpine Bank stepped up as a major sponsor. Claggett-Rey Galleries donated the exceptional wines being poured from Twomey Cellars and Silver Oak. After the presentations and dinner provided by Vail Catering Concepts, the guests danced to the music of the Diamond Empire Band.
On Thursday, July 10, Penny and I were honored to receive the Reach for the Peak Award from Walking Mountains Science School in Vail. Here’s the video they produced for us. https://vimeo.com/100357007
Sunday’s Minneapolis Star-Tribune contained a thoughtful article by Jennifer Bjorhus articulating concerns over capital gains taxes that Medtronic shareholders must pay when Medtronic completes its acquisition of Covidien.
As a long-time holder of Medtronic stock, here’s what I am planning to do and what I would suggest for other Medtronic individual shareholders:
- The easiest approach for Medtronic shareholders is to sell just enough stock to pay for the capital gains taxes, which will be 20% of the net gain to cover federal taxes. For Minnesota residents, there will be an estimated additional 8% tax depending on your income bracket. This must be done prior to the closing of Medtronic’s acquisition. Here’s my rationale: Medtronic stock is at an all-time high, so this is a good time to sell enough stock to cover your taxes. For example, if you bought your stock three years ago when Omar Ishrak became CEO, your gain is 65%. If you sell enough stock to cover the 28% tax, you still have a 45% gain in your stock value – not bad for a three-year investment – and no future capital gains taxes will be due on your 45% gain.
- If you can afford it, here’s an even better option that Penny and I plan to follow: give a significant portion of your stock away to your favorite charity or religious organization. Penny and I plan to give our Medtronic stock to the Penny George Institute Foundation (PGIF) at Allina Health, Plymouth Congregational Church, Georgia Tech (my alma mater for my 50th reunion), and the George Family Foundation. We plan to do this before the closing to avoid capital gains taxes. Then we will buy additional Medtronic stock in the open market as we believe Medtronic stock will be an excellent investment for many years to come.
For those of you who are interested in investing in health care and integrated medicine, here’s an additional opportunity to double your investment if you donate to the Penny George Institute Foundation: Penny and I will match any contributions of Medtronic stock to the Institute for the remainder of 2014. If you pursue this approach, you will receive a tax deduction for the full amount of your gift and avoid the capital gains tax, plus your gift will have double the value through our matching contribution.
For example, if you donate 100 shares of stock at the current market price of $64, you receive a tax deduction of $6,400 plus you avoid capital gains taxes, estimated at $720 if you bought three years ago. With our match, your gift will double in value to $12,800 for the Penny George Institute. (For more information, contact Stephen Bariteau at PGIF (Stephen.Bariteau@allina.com).
While none of us likes to be forced to pay taxes, the above approaches suggest there are ways to avoid any financial burden these capital gains taxes may impose, and potentially do a lot of good at the same time.
Thank you for considering these options.
Credit German-born Jürgen Klinsmann for turning U.S. Soccer into America’s Team.
While the Australians have their national rugby team and the Brazilians, Spanish and Germans have their national soccer teams, Americans have only had professional sports teams representing their cities. No wonder Europeans are so passionate about their national teams while Americans focus on the Dallas Cowboys, New York Yankees, Boston Celtics and Chicago Blackhawks.
Now that has changed. In less than a month, the gritty, determined 23 athletes chosen by Klinsmann to represent America in the World Cup have captured the hearts of America. Never before have Americans turned out in such record numbers to watch any team – pro or national – play four consecutive games. Never before have so many fans gathered in groups to watch an American national team. And in a country 5,000 miles away no less! Over 40,000 watched the games on large screens in Chicago’s Grant Park. America’s first game against Ghana attracted 16.9 million television viewers, making it the second-most-watched sporting event of the year. Tuesday’s game against Belgium attracted over 23 million viewers – an all-time record.
Klinsmann did so by cobbling together a group of players from all over the world, including seven dual-nationality players, into a cohesive fighting force that battled to the very end of every contest, including an exhausting, non-stop 120 minutes against Belgium in last Tuesday’s 2-1 overtime loss. They learned to play “The Klinsmann Way” – attacking the ball all over the field with non-stop running and collective defense.
In reality, America’s soccer talent cannot come close to comparing with the world-class stars fielded by Germany, Belgium, Ghana or Portugal. Yet the U.S. survived the most difficult group in the tournament, the so-called “Group of Death,” and advanced further than more talented teams like Spain, Italy and England. All because Klinsmann instilled the tactical discipline, physical conditioning, positive psychology and teamwork necessary to compete toe-to-toe with the best players in the world. The team performed strongly even without without striker Jozi Altidore, who played only 22 minutes of the Ghana game before pulling his hamstring, and Landon Donovan, who would have added much more offensive punch than side midfielders like Brad Davis, Graham Zusi and Alejandro Bedoya.
When he took over U.S. Men’s National Team in 2013, Klinsmann knew he didn’t have the talent to compete at the highest level. So he challenged America’s best players like Michael Bradley, Tim Howard, and Clint Dempsey to elevate their games, while integrating no fewer than seven dual-nationality players into the national team: German-Americans Jermaine Jones, Fabian Jones, and youngsters John Brooks and Julian Green; Norwegian-American Mix Diskerud, Icelantic-American Aron Jóhannsson, and Alejandro Bedoya of Columbian descent.
Unlike his predecessors Bob Bradley and Bruce Arena, Klinsmann isn’t just preparing for World Cup competition, but building American soccer for the long-term to the level of the best countries in the world. With his new four-year contract which adds the role of “technical director” for the first time, America has someone responsible for developing the cadre of talented youth players who can compete with the best in the world. In an encouraging sign of what’s to come, the U.S. Under-17 team has won four international competitions.
The good news is that Americans won’t have to wait four more years to see their new national favorites in action. Next July the U.S. will compete in the CONCACAF Gold Cup, a tournament it won in 2013, with a chance to qualify for the Confederations Cup in 2017 against the world’s best teams. Thanks to Klinsmann’s negotiating skills, the U.S. will host Copa America for the first time in June 2016 against the best national teams from South America (e.g., Brazil, Columbia, Argentina, Chile, Uruguay), the Caribbean and North America. All of this action with Klinsmann at the helm will prepare America to advance further in the 2018 World Cup in Russia. Meanwhile, thanks to Don Garber, Major League Soccer continues to grow in quality with the addition of Bradley, Dempsey, and Brazilian star Kaka as well as fan attendance and the addition of more franchises in cities like Miami and Orlando.
The future of soccer is brighter this summer. For the first time we can say with confidence that professional soccer is here to stay, and that Klinsmann’s troops have become America’s Team!
From StarTribune, June 28, 2014
With Medtronic’s $43 billion acquisition of Covidien, Pfizer’s failed $119 billion bid for AstraZeneca, and AbbVie’s pending $46 billion proposal for Shire, conflicting opinions abound about the merits and drawbacks of tax inversions. Some consider them unpatriotic. Others believe companies are bound by fiduciary responsibility to consider them.
My conclusion: Companies that do deals primarily driven by tax considerations are headed for trouble. This lets the tail wag the dog. The only justification for a merger or acquisition is to strengthen your company’s strategic position. That’s what motivated Medtronic CEO Omar Ishrak to pursue the Covidien acquisition: The companies fit together perfectly.
Here are five tests that boards of directors should satisfy before approving any deal:
Does the acquisition further your company’s mission? Your mission should provide purpose beyond financial returns that creates value for customers, employees, shareholders and other stakeholders. Most important, it should motivate employees to create innovations and deliver great service far more than financial incentives.
Does it advance your global strategy? If companies want to expand into higher growth markets, acquisitions can accelerate their growth. If its strategy is emerging market growth, acquisitions can provide greater presence. Sound acquisitions can also strengthen new-product pipelines.
Does it motivate your employees and the acquired company’s? Sustained value creation only occurs through dedicated employees working together to advance the company’s mission. The key is to engage employees of the newly acquired company to commit to their new owner. That’s what Medtronic did a decade ago with its acquisitions of Sofamor-Danek, AVE, and Mini-Med, as employment tripled. Acquisitions also create personal growth opportunities for current employees.
Will the acquisition lead to sustainable earnings growth? The acquisition should be accretive to earnings within two years, including realistic cost-saving synergies, without cutting back investments in future growth. Acquisitions like Valeant’s proposed hostile takeover of Allergan, which is based on cutting R&D spending from 17 percent of revenue to 3 percent, fail to produce sustainable earnings growth.
Pfizer erred in betting entirely on cost cuts to justify $240 billion it spent to acquire Warner-Lambert, Pharmacia-Upjohn and Wyeth. As a result, its shareholder value declined 32 percent in 14 years. In its failed bid to acquire AstraZeneca, the latter’s shareholders were extremely wary of Pfizer’s tactics.
Can the acquisition be funded without putting your balance sheet at risk? Successful acquisitions must generate future cash flow to repay the investment. These days borrowing money is cheap due to low interest rates, but companies shouldn’t get overleveraged in case of economic downturns, as they did in 2008-09.
What about taxes?
Taxes are the No. 1 question on everyone’s mind with Medtronic’s acquisition. After the company answered the first five questions affirmatively, it sought ways to finance it utilizing $14 billion in trapped cash. The tax inversion gave Medtronic access to these funds and also $7 billion in annual cash flow after the acquisition closes.
Do companies have an obligation to repatriate overseas earnings and pay the additional 35 percent in U.S. taxes? Not in the opinion of CEOs and CFOs. That’s why U.S.-based corporations are keeping foreign earnings abroad, leaving over $2 trillion in cash trapped overseas.
The U.S. already has the highest corporate tax rate in the world, which is a significant competitive disadvantage to U.S.-based global companies. To access overseas cash, even for domestic investments, there is a significant incentive for tax headquarters to migrate abroad. The ideal solution is for Congress to rewrite the corporate tax code. But given the stalemate that currently exists in Washington, a tax bill is highly unlikely before 2017.
In the near term, President Obama should declare a six- to 12-month “repatriation holiday,” enabling companies to bring cash home tax-free provided they present plans to reinvest the funds in capital expenditures, R&D, job creation and new ventures. I have recommended this approach since 2010. So far, nothing has happened. As a consequence, U.S. companies are finding alternative approaches such as tax inversions. Otherwise, they are in the unenviable position of being worth more to a foreign buyer than to their own shareholders.
Bottom line: Tax inversions should only be considered after the first five tests are answered satisfactorily.
From StarTribune, June 23, 2014
Medtronic’s move will benefit all
The headline in the Opinion Exchange section June 22 trumpeted: “It’s shareholders over stakeholders for Medtronic.”
Nothing could be further from the truth.
Commentator Stephen B. Young fails to comprehend that Medtronic’s acquisition of Covidien is being done precisely to benefit all of its stakeholders: customers, employees, shareholders and communities. Medtronic CEO Omar Ishrak justifies the Covidien acquisition because it extends Medtronic’s mission to 5 million more patients annually. Let’s examine the actual impact on stakeholders:
Customers: Since 1989, Medtronic has expanded from restoring 300,000 patients annually to 10 million today. With Covidien, 15 million patients will be restored annually. Combined R&D budgets of $2 billion per year will produce breakthrough therapies to help more patients. The combination gives Medtronic nearly $4 billion in emerging market revenues to make its therapies more affordable and this enables it to serve U.S. hospitals more efficiently.
Employees: The acquisition gives Medtronic 87,000 employees who enjoy good-paying jobs, health care and retirement, including 9,100 in Minnesota. Ishrak also committed to adding 1,000 more jobs locally, causing Gov. Mark Dayton to applaud the deal.
Shareholders: Since the announcement, shareholders have signaled their approval, bidding up Medtronic stock 5.2 percent. Since Ishrak became CEO in 2011, Medtronic stock is up 65 percent.
Communities: Medtronic has long been dedicated to building its communities, giving 2 percent of its income to philanthropic causes. Additional profits will expand its giving.
Much attention has been focused on Medtronic’s decision to relocate its legal domicile to Ireland. This shift won’t change its 18 percent tax rate, but gives Medtronic access to $14 billion in cash trapped overseas plus future cash flows of $7 billion annually. Medtronic already has paid local taxes on these earnings, so it isn’t avoiding taxes on them, and it continues paying U.S. taxes on all U.S.-generated revenues.
Medtronic has committed to reinvesting $10 billion of these funds in new ventures and technology acquisitions, because management believes the U.S. is the world’s best place to invest in medical technology and entrepreneurs pursuing innovative medical therapies.
The litmus test for me is: Would I have done this deal if I were still CEO of Medtronic? My answer is an emphatic “yes.” Credit Ishrak for having the courage to seize this golden opportunity to extend Medtronic’s mission and be a powerful voice in improving health care globally.
The writer is professor of management practice at Harvard Business School, author of “True North” and former chairman and CEO of Medtronic.
The headline in the Op-Ed in Sunday's Minneapolis Star-Tribune blared, "It's shareholders over stakeholders for Medtronic." Nothing could be further from the truth.
Medtronic's acquisition benefits all of its stakeholders: its customers, employees, shareholders, communities and society as a whole. I spoke at length with Medtronic CEO Omar Ishrak on Friday evening about these issues, as well as prior to the acquisition announcement. Omar is as committed to the Medtronic Mission as any CEO since founder Earl Bakken, myself included. For Omar, the Covidien acquisition expands the Medtronic Mission of contributing “to human welfare by the application of biomedical engineering to alleviate pain, restore health, and extend life” - to more patients. When Bakken penned the Mission in 1960, he intentionally covered all aspects of human health.
A Deal That Benefits All Stakeholders
Let's look at the impact on each group of Medtronic stakeholders:
Customers: When I joined Medtronic in 1989, the company was restoring 300,000 new patients every year to health. During the past 25 years that number has grown to more than 10 million patients per year. Now, with the Covidien acquisition, Medtronic will be able to restore more than 15 million patients annually. Patients will benefit enormously from therapies originally created by Covidien that treat cancer, gastro-intestinal, respiratory, peripheral vascular and neurovascular diseases. The combined company will have a Research & Development budget of more than $2 billion per year (5x the annual revenue of Medtronic when I first joined). This R&D capability will produce a wide range of new therapies that help patients in the years ahead.
To be clear, many of these therapies are innovations that create entirely new markets – restoring patients who otherwise had few alternatives. Adding Covidien's $1.6 billion revenues in emerging markets to Medtronic's $2.1 billion will enable the company to serve emerging markets at scale, making these therapies more affordable for all and expanding patient access to life-saving therapies.
Employees: When the acquisition is complete, Medtronic will employ 87,000 people with well-paying jobs and full health care and retirement benefits. Its home state of Minnesota will benefit from an additional 1,100 Covidien employees currently in Minnesota. All of these employees, regardless of origin, will be brought into the Medtronic Mission that offers them "a means to share in the company's success."
Moreover, the improved competitive position of the combined company will increase the long-term opportunities available for employees.
Shareholders: Since the announcement, Medtronic shareholders have enthusiastically embraced this deal, bidding up Medtronic stock $3.16 to $63.86, or 5.2%. That's in sharp contrast to most deals where shareholders sell the acquiring company's stock and buy stock in the acquired company. Six of the twelve security analysts recommending "hold" for Medtronic upgraded their recommendations to "buy." Of the 24 firms covering Medtronic, 18 now have "buy" recommendations, 6 "hold," and none "sell." Since Ishrak took over as CEO three years ago, the company's stock is up 65%.
Cynics may say gains to shareholders don’t matter, but I respectfully disagree. Strong financial performance sustains a company’s ability to invest in the long-term.
Communities: Medtronic has long been dedicated to the Minneapolis community and all communities where it has large concentrations of employees, consistently giving more than 2% of its pre-tax income to philanthropic and community causes. In addition, Medtronic committed to add 1,000 new jobs in Minnesota as a result of the Covidien acquisition, bringing its Minnesota employment to 10,100. This caused Minnesota Governor Mark Dayton to say the deal is "good news for Minnesota."
The one community that will suffer is Boston, where Covidien headquarters will be closed, an inevitable consequence of acquisitions. However, Covidien's main business locations along with Medtronic's locations can anticipate continuing increases in employment through growth in their businesses. This projection is borne out by the three major acquisitions Medtronic did over a decade ago - Sofamor-Danek, Arterial Vascular Engineering, and Mini-Med - whose employment and R&D investments have tripled in Memphis TN, Warsaw IN, Santa Rosa CA, Galway, Ireland, and Northridge CA.
Society as a Whole: Throughout its 65-year history Medtronic has been dedicated to serving society by improving health for people with chronic disease through its innovative therapies. This acquisition will enable Medtronic to accelerate its new therapies through an expanded R&D budget, extend them to more people in emerging markets, and expand its commitment to make the health care system more efficient.
Addressing the Critics
There has been much focus—too much focus, I’d argue—on the tax structure of the deal, through which Medtronic will relocate its legal domicile to Ireland. In its latest fiscal year Medtronic paid $640 million in taxes, 18% of profits. By changing its domicile to Ireland, its tax rate will not change materially. Medtronic did not do the Covidien deal to reduce its tax rate: it will still pay full taxes on all income earned in the United States.
The change in domicile enables Medtronic to utilize the $14 billion in cash trapped overseas as well as invest the $7 billion in annual free cash flow it anticipates in the future. Medtronic had already paid tax on these earnings in the countries where revenues were generated so it is not avoiding taxes on them. Rather, it avoids a form of double taxation – paying the added 35% U.S. tax in addition to foreign taxes on the same revenues, an approach being followed by all other global corporations. Medtronic’s situation is quite common. U.S. companies—including Apple, Google, and others—have more than $2 trillion trapped overseas by the inability to repatriate their earnings without added taxes.
In an interesting twist, Medtronic has committed to reinvest $10 billion of these funds in the U.S. in new ventures, technology acquisitions, and venture capital - over and above its current strategic plans. Medtronic management believes that the U.S. is still the best place in the world to invest in medical technology and support entrepreneurs pursuing innovative medical therapies.
In contrast to the Star-Tribune column, the one group that could experience a burden from this deal are current Medtronic shareholders who will owe capital gains taxes when the acquisition is complete. Depending on the cost basis of their stock, this could be significant, as it is for my wife and me. We have devised a solution to this problem that other Medtronic stockholders may want to consider: give Medtronic stock away to philanthropic causes.
In our case we plan to give our Medtronic stock to the Penny George Institute for Health and Healing at Allina Health and to the George Family Foundation, which gives grants for integrative health, authentic leadership, and vital organizations in our community. To continue to invest in Medtronic's future, we plan to buy additional Medtronic shares as soon as the deal closes.
The Star-Tribune Op-Ed columnist has the logic exactly backward. Medtronic's acquisition of Covidien is being done precisely to benefit all its stakeholders and to further the Medtronic mission. For me the litmus test is this: If I were still CEO of Medtronic, would I have done this deal? The answer is an emphatic "Yes." Omar Ishrak has demonstrated great courage with this step, making Medtronic an even more powerful voice in improving health care globally.
I just learned that my former company Medtronic has announced it will acquire Covidien for $43 billion - more than ten times the size of the company's largest deal to date. At first glance this looks like "a marriage made in Heaven." This combination enables Medtronic to extend its mission of using biomedical engineering to serve patients suffering from chronic disease, now totaling an estimated 15 million new patients per year.
The combination offers Medtronic a number of significant benefits:
- A near-perfect strategic fit that accelerates Medtronic's growth in vascular therapies with Covidien's market leading peripheral vascular and neurovascular therapies and puts Medtronic into the #1 position in gastro-intestinal, respiratory, and advanced surgery for a number of chronic diseases, including multiple types of cancer.
- Broadens Medtronic's investment in innovation with expanded research and development capabilities and ability to accelerate its R&D investments to more than $2 billion per year.
- Acceleration of Medtronic CEO Omar Ishrak's commitment to make Medtronic a major player in emerging markets. Covidien adds $5 billion in international revenues to Medtronic, much of them coming from rapidly growing emerging markets.
- A highly diverse revenue base that should exceed $30 billion in its first full year. This will expand Medtronic's ability to offer economic value to deliver health care more efficiently to leading health care providers.
- A financially attractive deal structure (60% stock, 40% cash) which is accretive to earnings in its first full fiscal year. Significantly, this deal enables Medtronic to utilize the $13 billion in cash it has trapped overseas. With this combination Medtronic becomes "a cash machine" with an estimated free cash flow of $7 billion per year.
- Worldwide Medtronic will have more than 85,000 employees and a market capitalization that should exceed $100 billion, making it one of the world's largest health care companies. This is up from 4,700 employees and $1.1 billion in market value when I joined the company in 1989. Medtronic will greatly strengthen its position in my home state of Minnesota which will become the combined headquarters for the new company.
I suspect the news media will focus much attention on the tax inversion that is required for Medtronic to change its legal domicile to Ireland in order to free up its overseas cash in order to finance the deal. It is interesting to note, however, that this change is not driven by tax savings, as Medtronic's current net income tax rate of 18% will not change. Medtronic has been active in optimizing its international tax position since the 1970s with its Puerto Rico locations. In 1996 Medtronic's European headquarters was located in Switzerland and its manufacturing position in Ireland was expanded through its 1998 acquisition of California-based AVE.
Kudos to Omar Ishrak in putting together such an attractive strategy to build the company in exciting new ways and extend its mission to "alleviate pain, restore health, and extend life." Medtronic's growth story continues.