Shares in Smith & Nephew fell more than 2.5% after a potential American suitor agreed to buy Dublin-based firm Covidien for $43bn (£25bn).
The Medtronic-Covidien deal is being driven partly by tax reasons as the US medical-device giant plans to relocate its headquarters to Ireland to slash its bill. The controversial move has been dubbed a "tax inversion", and European and US regulators are considering moves to clamp down on the practice as soon as next year.
Traders have sent shares in Smith & Nephew up 20% in recent months because its UK tax base could make it attractive to bidders amid a frenzy of takeover speculation in the sector.
American drugs giant Pfizer tried unsuccessfully to buy British's AstraZeneca last month in another bid that was widely seen as being driven by tax.
However, firms in the pharma and medical sector also want to merge to save cost as patents expire and governments cut their budgets.
Jefferies analyst Raj Denhoy reckoned Medtronic could cut 2-3% off its tax rate, pointing to Covidien's rate of 16% against Medtronic's present 18% rate.
Medtronic chief executive Omar Ishrak insisted reducing tax was not his prime consideration for the Covidien takeover.
"The real purpose of this, in the end, is strategic, both in the intermediate term and the long term," he said.
The takeover should save $850m a year in 'synergies'. Medtronic makes heart devices, spinal implants, insulin pumps and other products in areas such as weight-loss surgery, while Covidien designs devices used in a range of surgical procedures.
Smith & Nephew has a stock-market value of £9.5bn. Its shares fell 26p to 1044.5p.