While orthopedic implant maker Stryker (Kalamazoo, Michigan) said today that it did not intend to make an offer for Smith & Nephew (S&N; London) after a report in the Financial Times forced its hand, it seems likely that such a union for S&N with Stryker or another willing partner is inevitable. Stryker responded at the request of the UK Takeover Panel and confirmed that the company does not intend to make an offer for S&N. Post this announcement, UK takeover rules now prohibit Stryker from making a bid for S&N for six months, unless recommended by S&N’s board, in which case it can make an offer in three months. The Financial Times report said that Stryker had hired banks and was working on assembling financing for the bid, but said no bid was coming after the report came out. Part of the logic for the possible acquisition certainly stems from a desire to lower the company's tax obligations via an inversion, under which Stryker would use its takeover of S&N to relocate its headquarters to London, thus sheltering overseas revenues from U.S. taxation. To qualify for the inversion, at least 20% of the shares in the combined company would need to be held outside the U.S., meaning Stryker would need to fund a large proportion of any bid with its own stock. The UK has a corporate tax rate of 21%, which is dropping to 20% next year, compared with a 35% rate in the U.S. In addition, the UK only taxes profits that companies say are earned within its borders, while the U.S. taxes all earnings once the money is brought into the country. The other logical reason for acquiring S&N is to keep up with competitors as the orthopedic market continues its march towards ever larger economies of scale. Rival Zimmer agreed to acquire Biomet (both Warsaw, Indiana) for $13.4 billion last month to leapfrog Stryker as the second-largest company in the $45 billion market. Both Johnson & Johnson (New Brunswick, New Jersey), and Medtronic (Minneapolis) have said they plan to bundle their products and appeal to hospitals by providing a broader range of services. Larry Biegelsen of Wells Fargo wrote in a research note that the acquisition of S&N by Stryker would make strategic sense, given the recently announced Zimmer/Biomet transaction and the speculation of further consolidation in the orthopedic industry. “The combined Stryker and S&N would have over 30% market share of the hip and knee markets, second only to the combined Zimmer/Biomet, assuming the acquisition is completed,” Biegelsen wrote. Given that Stryker was only at an early stage of evaluating a takeover of S&N, He said it would not be surprising to see Stryker eventually bid on S&N. “We continue to think that Smith & Nephew remains a viable target for Johnson & Johnson or Stryker as the orthopedic industry enters a new phase of consolidation.” added Lisa Bedell Clive, an analyst at Sanford C. Bernstein & Co. in a research note. Stryker would also benefit from an increased proportion of sales outside of the U.S. (OUS). Currently, Stryker generates 34% of its revenue OUS which is relatively low compared to its peers, while S&N generates 57% of its revenue OUS. Additionally, S&N generates 13% of its sales from emerging markets, compared to 8% for Stryker. Stryker is committed to increasing its emerging market sales to 10% of total sales over the next 2-3 years and moving towards 15-20% longer term. Biegelsen pointed out one more thing that depending on one's point of view is either a positive or a negative. A Stryker acquisition of S&N "would further help alleviate pricing pressure in hips and knees given that the market would then move from five major players to three." Great for the companies and investors in the orthopedic sector, probably not so much for patients.