A weak economy and high unemployment have hit sales of medical devices hard, since patients have to take time off and, in the United States, dig deep into their own pockets to help pay for procedures such as knee replacements.

As a result, more and more companies are looking at acquisitions as a way to add new avenues of growth.

"As we move into an era where significant M&A is important, this ups the ante for the rest of the industry," said Seymour Pierce analyst Mike Mitchell, as Synthes confirmed on Monday it was in talks with J&J.

Shares in Smith & Nephew, however, fell on news that J&J — which people familiar with the situation said approached the British group in late 2010 — was now looking elsewhere.

Other stocks seen as possible J&J targets, including Intuitive Surgical and Edwards Lifesciences, were also weaker on the Synthes news.

Despite the share fall, analysts said S&N's position as a stand-alone operation, with a market value of around $10 billion, looked less certain in the long term, as pressure mounts on firms to achieve economies of scale.

One option for S&N could be a tie-up with U.S. rival Biomet, which is owned by Blackstone, Goldman Sachs, Kohlberg Kravis Roberts and TPG.

Bank of America Merrill Lynch tried to put together a meeting of chief executives from the two companies in January but the talks were cancelled after the news of a possible link-up leaked out, said one source.

"I still think Smith & Nephew will participate in consolidation because it has a pretty diversified business and some big growth segments that are attractive, like wound care," said Navid Malik, an analyst at Matrix Corporate Capital.

"Today's news will hit S&N shares but it doesn't mean consolidation will end. It's probably a signal of more to come."

SPREADING THEIR WINGS

Not everyone is convinced, however. Michael Weinstein of JP Morgan sees a Synthes-J&J deal as a one-off.

Elsewhere, a bunch of other U.S. companies are also looking to expand into new areas — but rivals may be reluctant, or ill-equipped, to bump up against J&J for Synthes.

"There are relatively few people who could buy it (Synthes). Medtronic would have to divest the spine business, it would be an expensive and quite dilutive deal for either Zimmer or Stryker, and Smith & Nephew is too small," said Jack Scannell of Sanford Bernstein.

Still, U.S. companies, some of which have overseas cash piles that would be heavily taxed if repatriated, are hungry for opportunities to spread their wings.

Medtronic could be a new entrant into the orthopaedics space, while Stryker and Zimmer — both best known for making replacement hip and knee implants — are eyeing other areas.

Zimmer, for example, is reported to be among bidders for AstraZeneca's dental implants and medical devices division Astra Tech.

While most medical technology companies are relatively focused at present that may be about to change, according to a recent note from Deutsche Bank reporting back on meetings with S&N management.

"With growing R&D needs as solutions advance from mechanical ones to biological ones, and increasing demand from emerging markets that requires significant additional investments in infrastructure, more scale and corporate clout would become increasingly important in the long term," it said.

Areas like trauma and wound care, which are less susceptible to macroeconomic conditions, are particularly appealing.

"The fundamentals in trauma are more attractive than in orthopaedics, pacemakers and defibrillators," said Sarasin analyst David Kaegi, commenting on J&J's decision to target Synthes rather than other companies in the sector.

Antitrust problems are a serious issue for executives and bankers looking to put deals together in the sector.

That is especially true in orthopaedics, where Zimmer has a 24 percent share of the reconstruction market, J&J 22 percent, Stryker 19 percent, Biomet 12 percent and S&N 11 percent, according the Stryker Fact Book 2009/10.

A Synthes-J&J tie-up would also bring with it antitrust problems given the enlarged group's dominance in spine work — but this appears to be something J&J is ready to deal with.

"It suggests that regulatory issues aren't an insurmountable problem and companies are looking through them in terms of divestments they may have to make," said Matrix analyst Malik.