Merger mania remakes the landscape

2014 was the year for medical device M&A activity. We don't expect to see med tech merger mania slow anytime soon, as the underlying motivations to improve growth rates, save on taxes and buy into new technology haven't changed. But there just aren't very many big medical device companies and that in itself limits the deal potential going forward.

The number of deals rose 39% to 57 announced transactions, according to MassDevice. Moreover, deal value increased more than sixfold in 2014 to $86 billion, up from $14 billion in 2013. Half of that sum is accounted for by looming $43 billion mega merger between industry bigwigs Medtronic ($MDT) and Covidien ($COV).

One of the major drivers of activity is a tax-saving tactic known as inversion, designed to avoid the high U.S. corporate 35% by changing a country's tax domicile. New Treasury Department rules put a damper on inversion deals, but haven't stopped the Medtronic/Covidien deal, or Abbott's ($ABT) sale of its developed-world, generic drug business to Mylan ($MYL) for $13 billion.

That deal fit within another more interesting trend, which is likely to prove more enduring and is not subject to the whims of regulators. Companies are selling noncore units to focus on what they do best. This is best exemplified by Bayer's sale of its peripheral vascular devices to Boston Scientific ($BSX) for $415 million.

Now Bloomberg reports Bayer wants to sell its noncore diabetes care unit too--perhaps to raise money to buy animal health company Zoetis ($ZTS)--a sign that "med tech merger mania" is still alive and kicking.

But the biggest company to keep an eye on in 2015 is Smith & Nephew ($SNN). Rumor has it that Stryker ($SYK) will snatch up the last remaining sizable orthopedics company to counter the impending $13.5 billion Zimmer/Biomet merger, designed to help the implant companies better negotiate contracts with consolidating hospitals in the post-Obamacare world.

And conglomerate Philips ($PHG) recently completed an internal reorganization and that will allow its healthcare division to operate more independently. Philips Healthcare already took one long-rumored acquisition target off the market with its $1.2 billion bid for cardiovascular imaging company Volcano ($VOLC).

Wall Street approves of the dealmaking. Bloomberg reports that medical device industry stocks posted a 22% return and outperformed the S&P 500 by about 10 percentage points this year, in large part due to the dealmaking activity.
As separate companies, Medtronic and Covidien made 10 deals in 2014 (not including the mega merger) but don't expect the combined company to do that in 2015. Indeed, venture capitalists aren't as thrilled by dealmaking, for the smaller number of industry bigwigs means that there are fewer opportunities for exits for smaller companies, especially in the near term, when integration of the new parts will be the focus.

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