NEW YORK (TheStreet) -- Shares of medical device and drug maker Covidien (COV) are falling after multiple media outlets reported that the Treasury Department is looking into ways of curtailing tax inversion deals. Covidien has agreed to be acquired by Medtronic (MDT) in a tax inversion deal.
BACKGROUND: Tax inversions refer to an acquisition of one company, usually officially based in a country in Europe or elsewhere, by a U.S. company, following which the acquiring company becomes domiciled in the same country as the company that it bought. The switch has the potential to significantly lower the acquiring company's tax rate.
WHAT'S NEW: The Treasury Department is looking at options that would enable the Obama administration to curtail inversion deals without authorization from Congress, multiple media outlets reported last night and today.
ANALYST REACTION: In a note to investors today, Wells Fargo analyst Larry Biegelsen wrote that he believes that Medtronic would buy Covidien even if the transaction cannot be done as an inversion. At a conference in June, Medtronic CFO Gary Ellis said that his company would "do the deal whether it's an inversion or not inversion," Biegelsen stated. If no inversion is possible, Medtronic would respond by using less of its stock and more debt to fund the transaction, the analyst believes. Such a change would actually cause Medtronic's cash earnings per share to be higher in the first and second year after the deal than under the current structure, the analyst indicated. He kept an Outperform rating on Medtronic.