Nine Takeaways: Healthcare M&A Insight from the Left and Right Brains
Healthcare M&A can be an arduous and high stakes game. Yet despite or because of the uncertainty swirling around the healthcare industry, the drivers of continued consolidation remain firmly entrenched. That’s leaving many to anticipate their own M&A transactions – hungry for advice and best practices on all fronts.
Last week, leaders from premier accounting firm BKD LLP, Matt Smith and Matt Klauser along with Anne Hancock Toomey of strategic communications leader Jarrard Phillips Cate & Hancock Inc. co-hosted a webinar for 250 healthcare and finance professionals entitled “Health Care Deal Design: Schematics for Success.” From that presentation — and the polling questions which took place during the program — numerous useful takeaways emerged which provide some insight into the M&A and investment markets.
- The Impetus to Combine is Strong, Unchanged – Uncertainty has been one of the most certain aspects of healthcare in recent years. With the current limbo of the AHCA, however, that uncertainty is only exacerbated. In uncertain times, healthcare players will invariably seek the safety and security that scale can provide.
- The Deals are Bigger, More Complex –While deal volume took a slight dip over the past year, it’s clear that consolidation is here to stay. What may be contributing to the decline is an increase in the creativity, complexity and size of partnerships which take longer to complete and often encounter barriers along the way. Not only are the deal structures more varied and there are fewer change of control transactions, but also large sophisticated systems are approaching partnerships strategically from a position of strength.
- Most Providers are Considering Affiliations –Nearly half of the healthcare leaders participating in the webinar reported that they had either recently completed a partnership transaction or are considering such a move soon. That data corresponds with prior reports from HFMA indicating that more than 80 percent of hospitals nationwide plan to pursue alignment with another hospital or health system in the coming years.
- Dealmakers Must Grasp Organizational Culture and Politics – While financial and legal considerations are important, 57 percent of the audience reported the top reasons for deal failure are culture or politics. Given this, healthcare leaders must anticipate and plan for opinions (and possibly opposition) from internal and regulatory audiences. Key tips include: Have a big story. Start internally. Engage early and often.
- Caution: AR Allowance is Extremely Subjective – Of all the metrics and estimates on a company’s balance sheet none are as subjective as the Accounts Receivable Allowance which, depending on the methodology employed, can have a significant impact on earnings. As BKD advises, if you want the clearest picture, dig deeper by matching transaction level billing and cash receipts databases, and applying the results to period-end AR aging reports by payer.
- Even Swap… But Tie Goes to the Buyer – Asked how the synergies should impact the players in a healthcare transaction, the majority of the audience took an egalitarian view with the most recommending an even split. Of the remainder, a significant portion believed that the value should belong to the buyer.
- Technology is King for Investment – Asked where the investment dollars will flow in the coming years, there was little doubt in the audience’s mind about the clear winner – technology. Also, expect to see significant interest in post-acute care, with behavioral health and urgent care rounding out the results.
- Multiples Are High, Volume is Good – When it comes to healthcare private equity investing, the outlook is solid. For their part, investors are taking an extremely targeted approach as they scout deals looking for disruptors and problem solvers as well as providers that are well positioned with payors. As always, there will never be a substitute for a strong management team backed by competent advisors.
- There is No Good Excuse for Skipping Diligence – That said, there are many excuses companies employ. Some of the greatest hits include: “It’s a simple, straightforward transaction”; “We know and trust the other party”; “There is no consideration transferred” and “We already have a business valuation.”
To hear more of these experts’ financial and communication strategies in greater depth, we encourage you to watch the webinar recast.
With any transaction, both perspectives – communication and financial diligence – are fundamental and crucial drivers of success. If “diligence is the mother of good luck,” as one slide quoted Benjamin Franklin as saying, then communication is the foundation of any strong relationship.
A successful M&A deal certainly needs both.
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