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Trends In the Evolution of Healthcare Consolidation Transactions

Mark Reiboldt, for HealthLeaders Media, April 19, 2010

As the medical provider community continues aligning toward clinical integration, and with the passing of healthcare reform—which is certain to change the industry forever—hospitals, health systems, and medical groups are looking to new alternative efforts to stay ahead of the curve, despite all of the changes happening around them. One of the results of these trends has been a boom of consolidation spurring mergers and other transactions, as many organizations consider these strategies that were in many cases not available previously.

In looking at recent transaction activity involving healthcare services companies, these deals represented more than 50% of total healthcare deals since January. Despite the ongoing burden of uncompensated care and looming threats of declining reimbursement, many entities are readily seeking transaction opportunities, including Community Health Systems (NYSE: CYH) and Health Management Associates (NYSE: HMA). These developments have attracted billions of dollars in new capital to the healthcare market, which we observed with the recent news of an HCA public offering, rumored to exceed $4 billion, according to Bloomberg and the Financial Times.

Healthcare sector leaders are under increased pressure to aggressively tackle alternative growth strategies in order to can gain an edge over emerging competitors, such as Catholic Healthcare Partners, which recently closed on a $180 million acquisition of a Cincinnati hospital and Ascension Health, which recently finalized a $1.35 billion bond financing that will capitalize the nation's largest not-for-profit health system's growth.

Throughout this evolution, many organizations have found themselves dealing with unfamiliar challenges. While a transaction may seem attractive on paper, it rarely takes long for executives to realize why more than 80% of mergers fail. For investment bankers, management consultants and other advisors, this wave of consolidation has turned into a bonanza of activity where leading organizations are seeking new solutions to propel future growth. There are three trends that have emerged through this evolution, which many executives are embracing in planning and executing their growth strategies.

Trend 1: Transaction Service Advisors. These advisors are becoming tremendous resources on healthcare deals. While many executives look at due diligence merely from a legal standpoint, today's most innovative companies are embracing the three-pronged approach to due diligence:

  1. legal diligence (contracts, litigation, regulatory matters, etc.)
  2. financial diligence (accounting, treasury, etc.)
  3. operational diligence (products/services, personnel, technology, supply chain, etc.)

It is the third component that is too often ignored, yet that is the one that typically results in the issues that are most challenging and time-consuming to resolve, or impossible to fix altogether.

This is especially pertinent within healthcare services, where deals often revolve heavily around individual providers. The risks acquirers must consider go deeper than legal contracts and tax filings. For instance, what will an acquirer do when they realize their high-producing target depends on technology that the firm is not able to adequately support or scale? Or, what about the likelihood that some of the providers will not maintain the necessary productivity to make the economics of the deal work?

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