This merger is pretty big news in your industry, isn't it?

You had a Buy on Kyphon for quite awhile before this news came out, and you've just recently downgraded it, correct?

I downgraded it to a Hold simply because the increase in the price, given the merger announcement. With the stock in the upper $60s - well above my original valuation target price - it made sense to downgrade it to a Hold. I believe the deal will go through in early '08 at the $71 per share price. But in any case, the upside is nominal here at this point.

Does this make Medtronic the clear and away leader in the spine category at this point?

Well, assuming the deal closes, of course - and I assume it does - yes it does. They were one of the largest players in the spine [group] to begin with. The one area they didn't have a large play in was in kyphoplasty. As you might recall, we talked about Kyphon in the past; they'd been pretty protective of their patent portfolio regarding kyphoplasty, and they've sued several competitors and removed them from the market or obtained royalties.

Medtronic was facing the same situation with Kyphon. In fact, both companies were currently embroiled in litigation, which of course will now dissolve or go away with the pending merger.

In the medical technology industry in general, are you seeing big mergers happening a lot these days, or is this kind of the first of what you think might be M&A activity that accelerates in this group?

Well, we've seen some reverse deals. We mentioned the Biomet (BMET) deal, which was a private equity arrangement, taking money out of the public market into the private market. This is actually the largest of the public deals that we've seen of late in the medical device space. We've seen a couple other smaller ones, including EV3 (EVVV), which is merging with FoxHollow (FOXH) - two small players in the peripheral vascular market. But this is by and large the largest one I've seen of late. This doesn't mean, of course, there won't be larger deals coming down the pipe, but nonetheless this is the largest one to date.

What's your feeling on this - do you think it's setting the table for bigger mergers in medical technology?

I know that several companies in the space, including orthopedic players like Stryker (SYK), Zimmer (ZMH), J&J (JNJ) - they're all looking for particular acquisitions that complement their portfolios. As I mentioned before, this makes perfect sense for Medtronic because it complements their current spine portfolio by adding Kyphon. And I'm sure, at this point, a few of the other players out there would have wished they could have acquired this deal, too. That being said, it's quite possible we may see a competing bid at some point, but I don't hold out much hope for that.

What should investors be mindful of regarding this deal and how it impacts the medical technology sector as a whole?

Medtronics, by buying Kyphon, in theory could add about one to two percentage points to its top-line growth, longer term. So that's a very strong argument for Medtronic to make, and it's a similar case for any larger medical technology company out there. The same case can be made that buying these fill-in deals or acquiring new technologies will increase your growth rate.

Gregory Aurand, CFA is a senior analyst covering the medical devices and supplies industry for Zacks Equity Research.