Medtronic Mulling Takeover of Smith & Nephew

By Jof Enriquez,
Follow me on Twitter @jofenriq

Medtronic is reportedly considering a takeover of the UK-based orthopedics company Smith & Nephew in a deal that could be structured as a tax inversion if Medtronic transfers its base overseas.

Medtronic is preparing a bid, but no offer is imminent, according to a Bloomberg article that cites anonymous sources privy to the plan. A deal would likely involve the transfer of Medtronic’s legal address to the UK to lower its tax liability, the sources said. The UK’s 21 percent corporate income tax is significantly lower than the 35 percent federal tax rate in the U.S. Much of Medtronic’s $14.2 billion in cash resides outside the U.S., so the company could benefit from moving overseas.

“Strategically, we do have this current problem that we have a lot of cash outside the U.S.,” Omar Ishrak, Medtronic’s chief executive officer, said in a previous interview with Bloomberg. “We encourage some kind of U.S. tax reform that allows us access to that cash in a more reasonable way.”

Analysts present at Medtronic’s recent investor day were split on the outlook of a potential deal.

“Management indicated that deals would be primarily based on strategic fit, not financial reasons such as tax inversion,” Larry Biegelsen, an analyst at Wells Fargo & Co. said in an article in Investor’s Business Daily. He added that an acquisition of S&N would not be a good fit for Medtronic, as the company only has 12 percent of the orthopedics market.

“We believe the deal fits with [Medtronic] CEO Omar Ishrak’s strategy of globalization. However, while [Smith & Nephew] may fill gaps in trauma and sports medicine, the company’s presence in joint reconstruction, which is the largest part of the market, is still modest,” Glenn Novarro, an analyst at RBC Capital Markets told Market Watch.

Cowen Group analyst Joshua Jennings was more optimistic, and was quoted by Investor’s Business Daily as saying, “We believe MDT/SNN combo would have limited product overlap, create cost synergies and provide MDT with a more strategic presence in Ortho.”

S&N, a company that makes knee and hip joint replacements, has been the subject of recent speculative bids by larger companies wanting to expand their orthopedic portfolios. As recently reported by the Financial Times, Stryker Corporation was likewise planning a bid for its UK rival.

Merger talks and takeover bids between medical device companies have heated up due to pressure from the U.S. Affordable Care Act to reduce healthcare costs. Consolidation would allow companies to pool resources and offer hospitals a better-rounded portfolio of products to win contracts, according to Bloomberg.