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Will Medtronic's Deal for Covidien Push Stryker to Smith & Nephew?

NEW YORK (TheStreet) – Nothing gets the blood flowing on Wall Street like mergers and acquisitions.

Companies with tons of cash but short on growth can have instant access new revenue and markets that would have taken years to build. And this is exactly what prompted Medtronic's (MDT - Get Report) $42.9 billion deal for Covidien (COV), which was announced on Sunday.

Covidien investors woke up Monday morning 29% richer, which is the premium Medtronic is paying to Covidien's last closing of $72.02. The deal is expected to close in the fourth quarter.

The logical question for investors has to be "who's next?" More importantly, finding profitable ways to play it. For this reason, names like Stryker (SYK), Smith & Nephew (SNN) and Johnson & Johnson (JNJ) should be on your radar.

A company like Stryker, which has a strong reputation for research and development, would make a great suitor for Smith & Nephew. Stryker's management has always had ambitions of becoming a medtech power.

Stryker's representative said the company had no comment.

More on Medtronic and Covidien:

Medtronic to Pay $43B for Ireland's Covidien

Medtronic and Covidien Deal Is Tax Strategy Guiding Healthcare M&A

Medtronic's Acquisition Isn't Just About Lowering Its Tax Bill

Stryker's management has done a remarkable job growing the company's reconstructive business, particularly its hip replacement and knee segments. They've done this amid fierce competition from Johnson & Johnson (JNJ). But now, a Medtronic/Covidien union is certain to add pricing pressure to Stryker.

Stryker can mitigate this effect with a deal for Smith & Nephew, which would give Stryker almost 33% in the hip and knee markets. No hospital that specializes in joint reconstruction would dare turn Stryker away if the company establishes such a large position in hip and knee replacements.

What's more, Smith & Nephew's strong position in areas like endoscopy, which is nonsurgical medical procedure that examines a person's digestive tract, would enhance Stryker's growth initiatives in that market. That combined with Smith & Nephew's wound-care business would give Stryker another "stickiness" factor with hospitals.

What's more, Stryker would also be able to capitalize on Smith & Nephew's access in emerging markets. Although there seems to be a better-than-expected recovery in developed markets, Stryker's exposure in undeveloped markets will otherwise take years to build. At some point, the growth potential in orthopedics will have to shift away from developed markets.

For these reasons, I expect Johnson & Johnson to also enter the discussion for Smith & Nephew, which also makes sense from an operational perspective. But Stryker needs Smith & Nephew to better compete with Johnson & Johnson and a more powerful Zimmer Holdings (ZMH).

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