Mergers & Acquisitions: Ingredients for a Successful Union
President and CEO
Seton Ventures and Alliances
Seton Healthcare Family
President and CEO
Hackensack University Medical Center
Michael B. Hammond
Hammond Hanlon Camp, LLC
New York, NY
LHP Hospital Group, Inc.
Karen Minich-Pourshadi (moderator)
Senior Finance Editor
LHP Hospital Group, LLC
Mergers, acquisitions, and partnerships are in some ways like a marriage. While no two are alike, a successful pairing is built on trust and an understanding of each other's decision-making authority and financial contributions. However, the success of a merger, acquisition, or joint venture also rides on how well the two organizations pair culturally. Hospital and health system leaders must look beyond the financial support and growth opportunity afforded by these unions and dig into the details to determine whether this type of arrangement will ultimately accomplish its goal.
HEALTHLEADERS: What distinguishes an acquisition from a joint venture or a merger?
MICHAEL B. HAMMOND: I am not sure that any of those terms are mutually exclusive in describing a business combination. In any business combination, one needs to look at two things in describing the relationship: ownership and control. I think of all business combinations as partnerships of some form. All are on a continuum where ownership and control have been allocated in some way. Generally a joint venture is a business combination that is not comprehensive. Often a joint venture is limited in some way, by geography, service scope, or time. However, a merger is often used to describe a business combination that is comprehensive; in a merger, the equity and the control need not be allocated proportionately.
DAN MOEN: These days nobody wants to sell their hospital, but many hospitals realize they need help. They begin looking at their "strategic alternatives," which usually include the possibility of a sale but also allow for other, more attractive options such as a joint venture. However, sometimes a potential seller hears "joint venture" and they think that they will have equal governance. Then they discover that they don't have equal control or ownership because of reserve powers required by their potential partner. Basically it becomes an acquisition. The key is to figure this out early so that you go in a different direction.
HAMMOND: There's also a merger of equals, when both parties essentially bring equal value to the business combination and the equity and control will be allocated accordingly. It's rare that both parties bring equal resources, assets, or value together, but often parties realize that the business combination will produce significant "synergies" and are willing to be flexible in allocating equity and control to realize the synergies from the business combination or joint venture.
Execution of a 50/50 joint venture is not a panacea, though. Disparities in resources can produce future problems in a 50/50 business combination. If both parties cannot maintain a 50/50 relationship because both can't capitalize it equally, trouble may develop. Because of the potential disparities in resources, many transactions disconnect governance from equity. In the business combinations where equity and governance are disconnected, the less well-endowed financial partner can still have a meaningful, if not an equal, role in strategy and management, yet not have the same financial obligations to support and grow the business.
HEALTHLEADERS: What do you look for when considering one of these opportunities and how do you assess its viability for your organization?
HAMMOND: When organizations embark on a strategic options analysis, we strongly recommend that the board spend a fair amount of time on the front end so they can build a consensus and articulate exactly what the organization is trying to accomplish. If the board fails to articulate the goals of a partnership, when they start looking at transactions—whether it's a partnership or a sale—they'll have no way to measure or value what options they have.
We also recommend that the organization forecast what the hospital's trajectory or future looks like as an independent organization. Because at the end of the day when you go out to the market, whether you're going to sell, partner, or whatever, you've got to measure what somebody offers you against what you can do on your own.
At the end of the day, the board must be able to evaluate the partnership or sale options against the option of remaining independent. Ultimately, it's equity and control that the board will be exchanging as part of a business combination.
ROBERT GARRETT: Becoming part of a joint venture or a partnership has a lot to do with access to strategic capital. In addition, there are a lot of ongoing capital needs just for basic operations. If you can find the right partner, the right joint venture can lessen the burden for capital so you can accomplish the goals of expanding a network and potentially reaching some economies of scale. I believe it's an alternative way to get to your goal without having to expend as much capital, while reinvesting in your current operations.
From our perspective, the major objectives are network development and growing our reach as a tertiary academic medical center into areas where we don't presently have a strong market share. However, I'd say the second thing we look for when deciding to pursue one of these deals is economies of scale. Then the third piece we look at is physician alignment. Does the joint venture enhance it? Whether it is directly aligning physicians with Hackensack University Medical Center or aligning us with another healthcare organization, we consider how this helps with our overall physician alignment strategy and how it can give us access to a larger physician network to support our tertiary and quaternary services and research activities.
TOM GALLAGHER: If I relate it to the Seton experience, when we look at acquisition opportunities, we see if they fit our core assets or an existing asset in the service area. For instance, hospital care is our core asset, so if there's a rural hospital that's considering its future alternatives, we would likely consider acquiring it, as opposed to creating a joint venture. We really want to use our capital toward our core assets and the growth of our core assets within the primary service area in which we operate.
Several years ago, our board asked us to create a more disciplined approach to how we evaluate joint ventures. We went through a process of actually identifying under what conditions we would consider doing a joint venture, and then we created the series of evaluation gates which every opportunity has to go through to answer why we want to pursue it.
For us, there are three areas where we are willing to do a joint venture: (1) to enhance geographic coverage, (2) for "channel support" or physician support—to align us with physicians, and (3) to advance the continuum of care in which we don't already have a core competency. So any joint venture opportunity we do has to answer one of those three criteria. It's worked well for us. We've done about a dozen joint ventures over the last five to six years.
HEALTHLEADERS: In light of value-based purchasing, obviously quality and patient satisfaction are two areas that are key to future reimbursement. How important are these statistics when an organization is considering or being considered for one of these opportunities?
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