NY Times DealBook: Former Medtronic C.E.O. Defends Inversion Deal

From The New York Times DealBook, June 16, 2014

Bill George, a former chief executive of the medical device maker Medtronic, came out last month against Pfizer’s proposed inversion – a deal to acquire an overseas competitor and reincorporate abroad, lowering tax rates and freeing up overseas cash.

“Is the role of leading large pharmaceutical companies to discover lifesaving drugs or to make money for shareholders through financial engineering?” Mr. George wrote on DealBook. “Does anyone believe pharmaceutical companies can create long-term shareholder value by chasing lower tax venues and cutting research and development spending?”

But on Sunday, when it was his former employer doing the inversion, Mr. George was all in favor of the move.

Medtronic is acquiring Covidien for about $43 billion, and will reincorporate in Ireland as part of the deal, making it the latest big American company to invert. But the company claims that the move is not driven by financial engineering. The two companies make good strategic sense together, Medtronic argues, and its tax rate is already low. The big financial advantage, it said, will be the ability to access overseas cash more easily.

Mr. George, who owns a small amount of Medtronic stock but has not purchased any shares in the last five years, and who has not consulted for the company since he left 12 years ago, likes this logic. Despite his previous opposition to Pfizer’s inversion, he said Medtronic’s move to Ireland made sense.

“The only reason they’re doing the inversion is to free up the cash overseas,” Mr. George said in an interview. “That money today can’t be put to good use right now.”

Indeed, Medtronic said it planned to invest $10 billion in the United States over the next 10 years with some of that cash, a move apparently intended both to appease critics of inversions, and to emphasize the importance of the United States for the medical device industry.

As for taxes, Medtronic’s current rate of about 18 percent will only be lowered by one or two percentage points. That could still amount to big savings over time, but it does not represent the kind of enormous tax cut that other inversions would achieve.

Besides, Mr. George said that as chief executive, he worked to lower Medtronic’s tax rate. ”Medtronic has always tried to optimize its tax position, to minimize the taxes paid under the law,” he said, citing specific examples on his blog. “The taxes are simply too high in this country.”

Mr. George did not back down from his critique of Pfizer’s attempted inversion. ”Pfizer’s rationale was wrong,” he said. “They saw a chance to cut tax rates and cut people and R.&D.”

And while he stood beside his former employer, Mr. George also said lawmakers in Washington should pursue comprehensive tax reform, or at least institute a tax holiday.

“We’ve got to look at the reasons people are doing this, the fundamental, underlying issues,” Mr. George said. “We have to offer a holiday, period, whereby people could bring their cash back.”