Ask These Questions Prior to an Acquisition

Richard Quinlan, for HealthLeaders Media, May 19, 2008

Healthcare industry mergers and acquisitions have achieved record-high volumes since the fourth quarter of 2007. But approximately two-thirds of recent mergers and acquisitions across all industries failed to achieve their anticipated results, and of those, one-third actually destroyed value, according to a recent review of 180 studies of M&A activity over the past 20 years, conducted by Dr. Robert F. Bruner at the University of Virginia in 2007.

The main reasons for the dismal results are inadequate due diligence; poor, if any, transaction integration planning; and an inability to execute integration, primarily due to underestimating the effort required. In this buyer-beware market economy, it is more important than ever for healthcare executives to make calculated decisions when researching companies to acquire. Additionally, because healthcare mergers and acquisitions are so expensive to execute and integrate, it is vital that the quality of the merger or acquisition be extremely high.

The investment community is optimistic that bankers, brokers, and executives are looking for strategic buyer transaction opportunities in the healthcare industry, particularly in technology, pharmaceuticals and physician practice groups. Today's economy makes it critical to conduct due diligence to determine whether an acquisition, divestiture, or business sale would be beneficial in the long run.

The first step in the due diligence process is to define and prioritize the key motivators of an acquisition that would ideally maintain a current business platform while growing the organization in the number of employees, amount of intellectual property or percentage of market share. By defining and prioritizing the key motivators, healthcare executives can further develop criteria for acquisition targeting. A methodical acquisition evaluation and execution strategy will increase the likelihood of a successful transaction and serve as a crucial step in ensuring the ideal acquisition is made.

Having a clear understanding of what differentiates one target from another, and keeping those characteristics in the forefront, helps focus due diligence in the areas that really count. The following 10 key questions uncover the primary drivers for businesses considering an acquisition.

The questions will help determine whether it is in the company's best interest to acquire a business, and, if so, which business in the interest pool would provide the most synergistic relationship. The more "yes" responses, the more beneficial the outcome will be. Fewer "yes" responses will put a possible acquisition into perspective, revealing that moving forward could do more harm than good.

10 key questions to ask prior to an acquisition

  • Will the organization gain a valuable new technology, product or process?
  • If a new product line is acquired, will it complement current products?
  • Will the company expand its geographic presence to better serve clients and consumers?
  • Is there an opportunity to enhance operational excellence?
  • Will the company gain ownership of sought-after equipment?
  • Will the company be able to strengthen the management team or overall culture?
  • Do cost-cutting opportunities exist?
  • Will the opportunity provide the organization with a defensive strategy for competitors?
  • Is there a specific client or consumer request to purchase a business or locate in a given geography?
  • Is there an industry-specific need to purchase a business or organization, whether strategic, regulatory or trade-related?

If the ideal acquisition is not defined by the purchasing organization in the beginning stages, the organization may unintentionally consider merging with or acquiring a business that would not have as synergistic a relationship as it could have accomplished if it went through the above exercise.

It may be tempting to buy a business or organization if the perceived quality is high and the sticker price is low, but if the business is hard to fold into the existing company, aggressive organic growth may be a better option. If a healthcare organization is considering a merger or a sale of the business, the checklist can help ensure the integrity, intellectual property, and people will be valued in the newly formed infrastructure.

When looking to efficiently evaluate target businesses or organizations to acquire or merge with, the keys to developing a plan that ensures transactions are aligned with the purchasing organization's strategic visions are to know what the organization should be looking for and having the right team in place to quickly evaluate prospective targets. Many ideal M&A opportunities exist in today's market. It is up to healthcare executives and evaluation teams to determine whether an opportunity is a fit for them, and strategic due diligence is the first step in that direction.

Richard Quinlan is the global director of merger and acquisition services for Jefferson Wells. He can be reached at or 800-826-5099.
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