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Medtronic Reported to be Considering an Acquisition of Smith & Nephew BY ANDREW VAHRADIAN, JUNE 5, 2014

Medtronic is reported to be considering an acquisition of Smith & Nephew. Presently, no offer is imminent as Medtronic's bid preparations are believed to be at an early stage.

The transaction would impart greater leverage to Medtronic with payor and provider networks, which are driving significant pricing pressures within the medical device sector through cost-cutting incentives initiated by regulatory changes, consolidation and more robust device purchasing models.

Furthermore, it is thought that the possible transaction would be structured as a tax inversion, which is when a company redomiciles through a merger with a foreign entity. Medtronic would use Smith & Nephew’s corporate shell to migrate its legal residence, and therefore its tax domicile, to the United Kingdom, which possesses a more favorable tax system with lower rates. Such cross-border deals are attractive to companies with a growing mix of international revenues as the United States' higher rates and more restrictive corporate tax system, limits the access of companies to their oversea cash balances, which in turn, confines buybacks and dividends and increases financing costs for U.S.-based acquisitions.

Last week, it was reported that Stryker was preparing a bid to acquire Smith & Nephew, however Stryker management later confirmed that the company does not intend to make an offer.

Interestingly, Medtronic and Smith & Nephew primarily operate in different device sectors and therefore, have minimal crossover between their respective product portfolios. Owing to this circumstance, antitrust concerns conceivably, would not arise in the scenario of Medtronic acquiring Smith & Nephew, unlike Stryker.

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