Medtronic snatched up Covidien for $42.9 billion, but the M&A party could just be getting started. The recent merger illustrates a growing movement within the industry, as devicemakers are feeling the pressure to cut their losses and consolidate.
Medtronic's ($MDT) purchase of Covidien ($COV) demonstrates the company's desire to lower its corporate tax rate by shipping its operations overseas. But moving its domicile to Ireland is only one part of the equation, as companies are relying on meaningful M&A to increase profit and expand product breadth, BMO Capital Markets analyst Joanne Wuensch told the Financial Times.
"What we may now be seeing is a race to reach a critical mass and not be left behind, so it's not just a trend of big company buying smaller company, this seems to be the beginning of larger-scale consolidation," Wuensch said.
The advent of the Affordable Care Act and a challenging reimbursement environment has persuaded some devicemakers to look elsewhere for revenue growth. Hospitals and payers are exploring more cost-effective solutions, and companies with bigger portfolios often reap the benefits.
"Medtech M&A in the near term seems to be shifting toward megadeals. Scale and portfolio breadth are increasingly being viewed ... as paramount to remaining competitive," Leerink analyst Danielle Antalffy told the Financial Times. "This deal will inevitably fuel the question as to who's next."
Medtronic's acquisition of Covidien puts the companies in the No. 2 spot behind Johnson & Johnson ($JNJ), the world's largest devicemaker. The deal follows a flurry of M&A activity, as other med tech outfits are joining forces to grab a larger market share. In April, Zimmer ($ZMH) signed a $13.4 billion deal to acquire Biomet and gain a stronger foothold in the orthopedics industry. The acquisition made sense from both a cost-effectiveness and patient outcomes perspective, Zimmer CEO David Dvorak said in a statement at the time of the deal.
"We believe that current demographic and macroeconomic trends affecting the healthcare industry will reward companies that successfully partner with other key stakeholders to improve patient care in a cost-effective manner," Dvorak said.
Orthopedics giant Stryker ($SYK) could also be eyeing a merger, as rumors circulated last month that the company was readying a bid for U.K. rival Smith & Nephew ($SNN). Stryker CEO Kevin Lobo confirmed that while the company was considering a deal, it didn't plan to make an offer anytime soon. The Kalamazoo, MI-based outfit already has 5 recent M&A deals under its belt, including a buyout of robot-assisted surgery outfit Mako ($MAKO) for $1.7 billion and its $764 acquisition of Chinese orthopedics giant Trauson Holdings.
Special Report: The top 10 med tech M&A deals of 2013