Medtronic Risks its Fortune Over Covidien Deal

Every success has its price.

Consider, for instance, the classic rags-to-riches tale of Apple Inc., the Steve Jobs incubator that hatched the i-trend. The onetime gritty startup is among the world’s most powerful, most profitable and most successful companies, thanks in part to its competency in global manufacturing. The iconic firm has achieved a pace of innovation nearly unmatched in modern history, churning out novelties like the iMac, iPod, iPhone and iPad at breakneck speed.

Yet Apple’s ascension to the i-throne was not without sacrifice, having been borne mostly by laborers from the developing world—some underage—who routinely work excessive overtime (12-hour shifts, six days a week) and live in overcrowded dorms without air conditioning, according to company reports and advocacy groups. Moreover, the multinational is reliant on global suppliers like Foxconn, a Taiwan-based electronics manufacturing giant that makes about 40 percent of the world’s consumer electronics products for such companies as Dell Inc., Hewlett-Packard Company, Microsoft Corporation and Sony Electronics Inc. A New York Times series in 2012 accused Foxconn of violating workers’ rights by exposing them to toxic chemicals and ignoring dangerous dust levels, the latter of which caused a fatal explosion in its Chengdu, China plant in 2011.

Apple executives, however, contend the company has made significant strides in improving its factories in recent years, developing a supplier code of conduct on labor conditions, safety precautions and environmental standards; and banning both benzene (a known carcinogen) and n-hexane (linked to nerve damage) from its final assembly processes.

“[The] iPhone was once a collection of parts that is often assembled by children who will never have time to play, get a decent education or know much about anything except assembling electronic components until they are too old or worn out to keep working,” eWEEK senior analyst Wayne Rash wrote in January 2012. “We bought that iPhone at a great price without a thought of what the social costs are in a country half a world away. This is the price for the type of life we lead, whether it’s the price that we pay to buy something once living that’s now a package of hamburger or the price we pay for a brand-new iPhone.”

The toll is just as steep at Medtronic Inc., the Twin Cities medtech darling that penned the original Cinderella business fable. Founded in 1949 by two-brothers-in law in a northeastern Minneapolis garage, the enterprise has grown into the world’s fourth-largest medical device company, employing more than 46,000 workers in 280 facilities globally. Its monthly revenue ($4.56 billion in the 2014 fiscal fourth quarter) dwarfs the paltry $8 Earl Bakken and Palmer Hermundslie struggled to earn during the firm’s first weeks of existence, and its technological prowess is light-years ahead of the large, bulky AC-driven pacemakers used on 1950s pediatric heart patients.

Medtronic’s metamorphosis into a multibillion-dollar innovator has earned the company an ongoing reservation at the Fortune 500 club over the last decade. One of the few medtech firms admitted, Medtronic has climbed steadily through the magazine’s ranks since the millennium’s onset, rising from a 381 standing in 2000 to 173rd place this year, down slightly from a high of 158 in 2011.

The company’s “fortune” could soon change, however. Despite its star status, Medtronic risks losing its 500-club membership for buying rival Covidien plc and moving its corporate headquarters to Ireland to reduce its corporate tax burden by nearly two-thirds. The $43 billion deal allows Medtronic to shift its tax base overseas and create a holding company in a more tax-friendly country (the Emerald Isle charges its businesses 12.5 percent on their earnings while America collects 35 percent).

Medtronic CEO Omar Ishrak insists the Covidien purchase is a fundamental business strategy rather than a tax-dodging tactic, noting Medtronic is “developing new ways for hospitals and device makers to be partners in the evolving value-based healthcare environment.”

Regardless of intent, the Covidien deal violates the magazine’s current rules requiring Fortune 500 companies to be domiciled in the United States. “As per our current rules, if Medtronic reincorporates outside the U.S., it will be removed from the list,” Michael Cacace, Fortune’s senior editor in charge of lists, told the non-partisan website MinnPost.

Medtronic isn’t the first—and likely won’t be the last—to be kicked off the Fortune 500 list for securing a foreign address. Since 2000, eight companies have been blacklisted from the roster for relocating offshore, giving rise to the moniker “runaway companies.”

The runaways include:

• Eaton Corporation plc, from Cleveland, Ohio, to Ireland.
• Ingersoll-Rand Inc., from Parsippany, N.J., to Ireland via Bermuda.
• Aon plc, from Chicago, Ill., to the United Kingdom.
• Tyco International Ltd., from Princeton, N.J., to Switzerland through Bermuda.
• Liberty Global plc, from Englewood, N.J., to the United Kingdom.
• Seagate Technology plc, from Scotts Valley, Calif., to Ireland via the Cayman Islands.
• Cooper Industries Ltd., from Houston, Texas, to Ireland through Bermuda.
• Foster Wheeler AG, from Clinton, N.J., to Switzerland via Bermuda.

Medtronic’s removal from the Fortune 500 list is unlikely to have any significant impact on the company, save for a bruised ego. Moreover, Medtronic seems apathetic to the consequence: “We are aware of the policy that Fortune magazine has in this regard and will not be engaging the magazine on this matter,” Rob Clark, Medtronic’s vice president of global communications, said in response to a MinnPost inquiry.

Nevertheless, the ramifications illustrate the commitment multinational firms now have to their global shareholders. Bloomberg data indicates that 44 U.S. companies have reincorporated on foreign soil or made plans to do so since 2008, including 14 since 2012.

“This is not something that is brand new. Companies have been reincorporating in the Caribbean for decades,” said Venkat Rajan, advanced medical technologies principle analyst at Frost & Sullivan. “It’s become a trend in the sense that some of the bigger conglomerates are considering it and figuring out if it makes sense for them. The majority of medical device companies are too small to benefit from reincorporating outside the U.S. The bigger firms might consider it, but they’ll probably wait to see how it all plays out for Medtronic.”