Investors and bankers have been lamenting the potential death of large cross-border health care mergers since the U.S. Treasury Department announced in late September that it would curtail the tax breaks from international deals designed to give U.S. companies a legal home in a low-tax country.

But now bankers and small-cap investors see a silver lining: Instead of quashing mergers and acquisitions altogether, the Treasurys proposal on tax inversions may pull dealmaking onshore.

Companies, particularly in health care, that were looking to do big cross-border transactions now are refocusing on small and mid-cap U.S.-based deals, bankers say.

Fundamental M&A should accelerate in the U.S., especially in respect of mid-cap biotechnology and specialty pharmaceutical companies, said Michael Meyers, head of investment banking at Los Angeles-based T.R. Winston & Co.

Small acquisitions have traditionally been a staple of the health care industry as biotechnology and pharmaceutical companies try to add the most promising new drugs in development to their pipelines. But in 2010, the tax advantages Canada-based Valeant Pharmaceuticals International Inc. and Jazz Pharmaceuticals of Palo Alto, Calif., obtained through inversion deals set off an arms race for similar benefits.

Now many bankers and investors expect companies that had to cancel their inversion deals, such as Abbvie Inc. and Shire Plc, to go back to basics.

Pfizer Inc. and other companies that have not done an inversion deal are under more pressure to grow through acquisitions to compete with those that have a lower tax rate, several investment bankers and investors told Reuters. During Pfizers third-quarter earnings call, executives said the company would assess deals on a case-by-case basis.

Likely targets, investors and bankers said, are companies with one or two promising new products, such as Avanir Pharmaceuticals Inc., which has an Alzheimers drug under patent; San Diego-based Neurocrine Biosciences Inc., which has partnered with Abbvie on an endometriosis treatment; and Puma Biotechnology Inc., which is developing a breast cancer drug.

All three companies are rumored to be the object of takeover deals in the next few months. None responded to requests for comment.

On Sept. 22, the U.S. Treasury Department announced a series of steps designed to make inversions more difficult and potentially less rewarding.

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Health care sector sees silver lining in U.S. tax inversion rules