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Medtronic's Acquisition Isn't Just About Lowering Its Tax Bill

Interestingly, according to Omar Ishrak, Medtronic's CEO, the company's relocation to Ireland is not going to cause any meaningful reduction in Medtronic's tax rate.

This is because Medtronic has been successfully maintaining a low corporate tax rate by keeping its foreign operations outside of the U.S. The company has also taken advantage of the research and development tax credits. As a result, in the previous fiscal year, the company's effective tax rate was 18.4%.

Following the acquisition, Medtronic will significantly grow in size. Medtronic had more than 46,000 employees and earned annual revenue of $17 billion in its previous fiscal year. The new company, however, will have nearly 87,000 employees and will earn combined revenue of $27 billion, of which nearly 48% will come from outside the U.S.

The bigger Medtronic will have a large portfolio of products for its hospital customers. The company will become a one-stop solution for its clients. Consequently, the new company might post better growth rates than Medtronic or Covidien. The former has struggled with revenue growth in the low-single digits while the latter's sales in 2013 were nearly the same as they were five years ago.

The bigger company, with operations in 150 countries, will be in a better position to compete with the industry leader Johnson & Johnson (JNJ).

The deal will also result in annual pre-tax cost synergies of at least $850 million by 2018. Medtronic has not identified the revenue synergies the deal might create, albeit the details are still coming in. 

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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