While many private equity investors appear to be focusing on the high and low ends of the device investment spectrum, Chicago-based Water Street Healthcare Partners is a firm carving its niche out of middle-market opportunities.

The first article in a two-part series, The Boston Consulting Group (BCG) explores the financial rationale driving the steady trend of M&A activity in the medical technology sector-as well as the business implications that result. Here, the authors examine the phenomenon of external players-industrial companies, conglomerates and others-acquiring companies and entering the medtech sector. The series draws on the valuation techniques, used by BCG's ValueScience Center, which combine proprietary discounted cash flow and relative valuation multiple models.

Smiths Group, a diversified manufacturer operating in aerospace, industrial detection, specialty engineering, and medical products, is offering $925 million for Medex, a leader in medical safety devices and anesthesia. The deal is about merging complementary strengths in non-overlapping product areas to accelerate sales growth. And it's about critical mass: within a year, says Lawrence Kinet, board member of Smiths Medical, the newly merged medical division will join "the billion dollar club," an important threshold in the world of medical devices.