Already a global giant in medical devices, Medtronic ($MDT) is considering growing even larger with a possible bid for Smith & Nephew ($SNN), which has been the subject of M&A talk for the past few weeks following reports Stryker ($SYK) would seek to buy the U.K. maker of hip and knee replacements.
Medtronic's possible bid for Smith & Nephew was reported by Bloomberg June 4, citing unnamed sources. Two people close to the matter told the news service Medtronic is in the early stages of formulating a bid, but no offer was imminent. One of the people said Medtronic's bid was more serious than what Stryker had been considering.
Both companies declined to comment in the Bloomberg story. The silence continues. During an investor presentation today, June 5, Medtronic said that the executives will not entertain any questions on the rumored interest in Smith & Nephew.
Last week, Stryker CEO Kevin Lobo confirmed that his company was considering a deal, but didn't plan to make an offer anytime soon. Lobo's comments were the result of the U.K. Takeover Panel contacting him after deal speculation spurred Smith & Nephew's shares higher. They've gained as much as 7% since May 29.
Under U.K. rules that govern takeovers, Stryker cannot make a bid for 6 months, unless the S&N board approves an offer or if another party makes a bid or declares its intentions to make one. In either of those cases, the waiting period can be shortened to three months.
Medical device companies are under pressure to consolidate and scale up in order to offer more products at cheaper prices to hospitals and other healthcare providers that have become more cost conscious as a result of the U.S. Affordable Care Act. Both Medtronic and Johnson & Johnson ($JNJ) have said they are looking at ways to bundle their products to meet that need.
Merger mania in the medical device field, particularly in orthopedics, began to heat up in 2012 when J&J bought Synthes for $21.3 billion. To gain regulatory approval for that deal, J&J sold its trauma business to Biomet for $280 million. In April, Zimmer Holdings ($ZMH) ponied up $13.4 billion to buy rival Biomet. That deal is expected to close in the first quarter of 2015.
Yet, U.S. regulators are the 800-pound gorilla looming in corporate deal rooms. According to a recent Wall Street Journal story, together Zimmer and Biomet would hold between 35% and 40% of the global market for hip and knee replacements. If Stryker were to buy S&N, that entity would have 35% of the market with J&J controlling about one-fifth. Do the math--it leaves three players dominating the hip and knee medical device space.
Additionally, a U.S. company like Medtronic could structure a tax-inversion deal with a company like S&N by using the corporate shell to move its legal residence to the U.K. Currently, the U.S. federal tax rate for corporations is 35% while in the U.K. it's 21%. Medtronic CEO Omar Ishrak recently said he wouldn't rule out a tax-inversion deal, though he encouraged U.S. tax reform.