HC Mergers and Acquisitions

Posted on September 8, 2010

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Mergers and acquisitions (M&A) activity is pretty exciting because, along with company start-ups, it is the most visible evidence of the economic Darwinism we call free market capitalism (although there is belief that with the current doom-and-gloom climate that, too, will evolve in our lifetime).

M&A activity is typically supported by economists and industry experts for several reasons, but a main one is because M&A yield larger, more diversified companies with stronger assets better positioned to respond to market fluctuations (like very slow economies) and with built-in efficiencies that lead to better prices for the consumer. Airlines are a good example of smart M&A in a desperately flawed market.

Why engage in M&A? Revenue. More specifically, an opportunity for cost-efficient growth. M&A as a tactic to feed revenue is measured against its alternatives: do nothing or grow organically. Theoretically, doing nothing offers no or only marginal opportunity for additional growth. 

In their Summer 2010 report “McKinsey on Finance”, McKinsey & Company reported there were five successful types of acquisitions that create value:  1) improving performance of the acquisition target; 2) removing excess capacity from an industry; 3) creating market access for products; 4) acquiring skills or technologies more efficiently than could be built; and 5) picking winners early to help develop their businesses.

Strangely, “merger activity tends to peak when markets are at their height” according to Fortune magazine, and “companies are twice as likely to acquire businesses in ther major segments during an upturn as they are during a downturn, the opposite of what makes sense.”

M&A targets in healthcare can be categorized just like those on Wall Street:  the weak (vulnerable but not failing), the strong but small (growing but undercapitalized), and the hidden gem (strong balance sheet but too passive toward growth).

Healthcare is a bit of an enigma because in some rural markets beds are at a premium, while in other urban areas there are a glut. When specialty needs like cancer treatment are considered, market distinctions can be harder to identify and supply. In general, economic theory supports fewer, larger companies as opposed to many, smaller firms because it benefits the consumer; although there is a point at which diversification and competition must be maintained because there can be too few big fish at some point (hello, banking).

Any company in business has value beyond its balance sheet because on some level it has proven success at fulfilling a need or it would be out of business. An existing hospital has people, a reputation in its community, physical assets like a building and maybe real estate, and a customer (patient) base. These attributes are all cheaper to buy than build, or at least they can be acquired at some form of discount compared to expending resources to purchase separately and put into place.

Simply put, there is less risk because the hospital being purchased has put them together in a way that works on some level. Consolidation can also deliver efficiencies of scale so immediate savings are often realized by elminating duplicate costs like merging administration, risk management and operations.

Risks abound in M&A: cultural integration, legal liability, antitrust concerns and overestimated synergies and savings, to name a few. Law firms specializing in the intricacies of healthcare M&A are best consulted prior to pursuing anything of the sort. Mergers and acquisitions is a complicated but potentially rewarding activity to be considered for well-positioned hospitals that have been saving for a rainy day.  That day is here.

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