Jarrard M&A Spotlight Series Part 2: Secret Sauce for Successful Deals
A four-part series on M&A featuring advice from healthcare dealmakers
Part 2: Secret Sauce for Successful Deals
By Anne Hancock Toomey
For board members and leaders, it’s daunting to decide to merge with another provider. As our panel of M&A experts explained in last week’s post, the decision involves clearheaded planning, incorporating board input, thorough assessment of the cultures at both organizations and painstaking legal review.
Success in completing a deal requires a whole new wave of work and a distinct skillset among leaders spearheading the change.
Those of you jumping into the deal pool, never fear. Here’s what our experts have to say about ensuring your transaction is a win.
Today’s question for our experts:
“What are the most common factors that make deals succeed?”
The key is a very organized process from the start, not trying to short cut steps and pick a partner or path too early. It is critical to ground an organization’s strategic options assessment in a well-defined set of criteria (the more detailed the better) on why you are thinking about a partner and what you need to achieve from a relationship. Define specific goals and needs that are important, but also realistic. It sounds simple, but often gets more complicated as you go along. This is absolutely critical to re-grounding thinking when emotions run high, when persuasion from specific constituents develops and when ultimate difficult decisions need to be made.
Include culture in your diligence process and integration strategy to increase the likelihood of a successful deal. Evolving two cultures into one is a long process that requires patience, transparency and communication. Invest the time and effort to make sure that the culture that evolves is in line with the collective mission and vision of the combined organization.
From the legal perspective, clarity of understanding around deal terms is key. That may include more specific provisions around indemnification, including fundamental representations, baskets and caps, to be negotiated in the LOI phase. In my experience, negotiating those terms on the front end avoids what can be heated negotiations later in the deal process when deal fatigue can set in.
I am amazed at how often culture trumps dollars. If the parties have a good cultural fit, the economics usually work out. This is true especially in a competitive process.
The partners should share a common mission and purpose, with the ultimate goal to best position the health system for the future. Given the many pressures of a transaction, it is important for the parties to have similar missions and cultures.
Socialization of boards and management teams with one another and frequent in-person meetings also helps build strong relationships and foster trust. As the negotiations get more difficult and deal fatigue starts to set in, the strength of the relationship will help the parties move through the process with the ultimate goal in sight.
Finally, well-designed integration and communication plans and effective execution of such integration and communication plans are essential. A transaction necessarily means change for the parties. Within the confines of anti-trust laws and consistent with best practices, the parties will want to think strategically how to best integrate their organizations. The sooner that they can think as one the better. In addition, all constituents in the process will experience some form of change, and providing well thought out communications at the appropriate time will help assuage some of the fears and erroneous speculation.
Timing is crucial. Do not wait until you need a partner to look for a partner.
It’s also imperative not to overlook the importance of evaluating the cultures, values, leadership and communication styles of the organizations and not only how they align but also how they may be impacted going forward.
The primary reason that hospitals sell or merge is because they are in trouble. That means that the selling/merging hospital needs to be fixed. So, on a post-transaction basis, the deals that work are the ones that allow the buyer to implement change and the buyer does just that.
Our experience is that M&A transactions in the nonprofit hospital industry are pursued for very different reasons than their corporate corollaries. Business combinations between industrial companies are often motivated by vertical ‘synergies.’ Generally, this is code for cost savings achieved by consolidating back-office functions or moving operations into more efficient settings (e,g., offshoring manufacturing). Understandably, such strategies are viewed skeptically by nonprofit fiduciaries.
The hospital industry is different, however. Hospital companies have limited and unique access to a singular capital market – the tax-exempt municipal market. In addition, the delivery of medical care, while incredibly complex, is not venture in new product development – think Uber creating an entirely new product. As a result, successful hospital transactions are typically motivated by horizontal ‘growth’ potential. If system A acquired hospital B, could the new parent increase B’s market share by building a more robust cardiac specialty program? If System A deployed its capital and expertise to replace hospital B’s campus, could this stem patient outmigration patterns? Would B’s inclusion in a narrow network drive increased volume locally?
Answering these questions is much more difficult than determining if a few basis points could be shaved off the cost of capital or if the IT department could be downsized. Looking back on the transactions that Juniper’s bankers have been fortunate to advise on over the last 25 years, it is those that seek to solve a pressing problem that succeed long-term. Filling a short- term operational need – such as receiving a commercial insurance rate increase or installing a new HIT platform—is rarely as impactful.
Part 3 of our M&A Spotlight Series will appear Thursday, July 27, 2017. In it, our experts will answer: “What are the most common factors that make deals fail?”
Have Our Thinking Delivered to Your Inbox »