After the Breakup: How to Manage When Your Potential M&A Partner Walks Away

UnityPoint Health rejected a potential merger with Sanford Health this week, forcing the CEOs to readjust after touting the expected benefits of a deal they ultimately didn't consummate.

The two of you have been courting for months. The relationship looks promising. You've talked at length about your future together. Then, out of the blue, they tell you they're headed in another direction. It happens.

Moving forward after a potential merger or acquisition partner walks away from the negotiating table isn't easy—you'll have to revise your vision of the road ahead and adjust your strategic communications accordingly—but it's doable.

This uncomfortable position, being rejected after an extensive M&A due diligence process, is precisely where Sanford Health President and CEO Kelby Krabbenhoft finds himself this week. The Sioux Falls, South Dakota–based health system had been in merger talks with UnityPoint Health, based in Des Moines, Iowa, to form an $11 billion enterprise with 76 hospitals. But the two nonprofits announced Tuesday that UnityPoint had backed out.

The news prompted some finger-pointing from Krabbenhoft, who had been expected to serve as president and CEO of the post-merger organization. Krabbenhoft expressed disappointment that UnityPoint's board "failed to embrace the vision."

UnityPoint President and CEO Kevin Vermeer, who had been expected to serve as senior executive vice president of the post-merger organization, said his organization decided it would be better to maintain its existing corporate structure than to move forward with the merger.

"For us to grow as a system, we look for three things: strategic alignment, a strong cultural fit, and the right timing," Vermeer wrote in a staff memo that UnityPoint shared with HealthLeaders. "In this case, we deeply respect Sanford Health, but this specific partnership opportunity did not work out."

"I said this before, and I'll say it again—we are strong with a partner and without one. I truly believe this," Vermeer wrote in his memo.

Krabbenhoft and Vermeer were unavailable to answer additional questions beyond their written statements.

Sanford's Bold Agenda, Deep Pockets

Sanford Health is named after credit card mogul T. Denny Sanford, who has donated hundreds of millions of dollars to the health system.

The philanthropic partnership dates back to the mid-2000s, when Krabbenhoft, the president and CEO of what was then called Sioux Valley Hospitals and Health System, outlined his aggressive vision for medical research and care delivery and sought the billionaire's financial backing, according to the Sanford Health Foundation.

Krabbenhoft has since led Sanford Health through a series of mergers and acquisitions, growing the organization into a 44-hospital system with operations in 26 states and nine countries.

Allan Baumgarten, a consultant and long-term observer of healthcare industry trends in the Midwest, says Krabbenhoft clearly has an ambitious agenda for the health system he leads.

"Sanford has deep pockets, wants to expand, wants to make acquisitions," Baumgarten says. "It's not surprising that you would hear quotes from him saying they didn't share the vision, they weren't as advanced as we are about what the future of healthcare is going to be."

This isn't the first time, though, that Krabbenhoft's vision has been foiled by M&A negotiations coming undone, Baumgarten says, pointing to Sanford Health's failed attempts to acquire each of the two largest health systems in Minnesota's Twin Cities: Allina Health and Fairview Health Services.

Sanford had been in talks with Allina before moving on to Fairview, as Krabbenhoft has acknowledged, according to a 2013 report by the Minneapolis Star Tribune's Jackie Crosby. Sanford then withdrew from M&A negotiations with Fairview amid criticism from some stakeholders and questions from the Minnesota attorney general.

Earlier this year, Sanford closed on its merger with nonprofit senior care provider Evangelical Lutheran Good Samaritan Society, and Sanford abandoned its efforts to acquire Mid Dakota Clinic amid a challenge by the Federal Trade Commission.

Market Boundaries Still Expanding

Even though Sanford's merger talks with UnityPoint ended without a deal, there's still no question in Baumgarten's mind that health systems are increasingly pursuing tie-ups involving non-contiguous service areas—as evidenced by several recently completed mergers, including last year's formation of Advocate Aurora Health in Wisconsin and Illinois and Bon Secours Mercy Health in Ohio and Maryland.

In a sense, the regional boundaries of local markets are expanding, he says.

"I think hospital systems are still very interested in expanding their geographic reach, trying to gain market power that cuts across major geographic service areas, trying to focus on areas where there might be a statewide or regional presence of major employers that they could deal with directly," Baumgarten says.

There are, however, other high-profile examples of much-buzzed-about transactions ultimately fizzling.

Related: Sanford Health CEO Faults UnityPoint Health for Failed Merger Talks

Related: It's Not You, It's Me. Addressing Cultural Compatibility in Mergers

Last year, talks of a potential merger between Atrium Health and UNC Health Care fell apart, after an apparent power struggle; a rumored merger of Providence St. Joseph Health and Ascension didn't happen because leaders decided the timing wasn't right; and Memorial Hermann Health System and Baylor Scott & White Health called off their merger without offering much detail about their decision.

Identifying precisely which factors contributed to an individual transaction falling through can be difficult, especially from the outside. But past breakups like these have revealed several common themes, including both financial and operational concerns, according to a 2019 HealthLeaders intelligence report that surveyed executives about the reasons they abandoned an M&A plan before or during the due diligence phase.

On the financial side, the top three reasons that respondents cited were assumption of liabilities (23%), regulatory issues (22%), and concerns about risk/revenue sharing (20%). On the operational side, the top three reasons were mistrust between parties (30%), concern about governance (27%), and incompatible cultures (21%).

Post-Breakup Communications: 5 Tips

In most cases, when a deal falls through, the parties say respectful things about each other and indicate a willingness to explore other opportunities in the future, but Krabbenhoft apparently didn't feel obligated to take that kind of approach, Baumgarten says.

The fact that Krabbenhoft publicly expressed disappointment in UnityPoint's board may give other health system CEOs a reason to hesitate if he approaches them to initiate an M&A dialogue because there may be a perception that those who don't let Krabbenhoft have his way will get "smacked around in the newspapers" for it, Baumgarten says.

"I think interpersonal relationships are important," he says. "It's not unlike divorces or engagements that end up being broken up before the wedding takes place. What do you say about the other person? Do you burn bridges? Do you try and make it look like you were the good guy and the other was the bad guy?"

"There is something to be said for a communications strategy that is respectful and cordial and that is all positive, rather than remarks of disdain and disrespect," he adds.

Even if the prospect of your partnership has come to a close, your communications campaign about that partnership is ongoing, as David Jarrard, the CEO of healthcare strategic communications consultancy Jarrard Phillips Cate & Hancock Inc., writes in the HealthLeaders book Healthcare Mergers, Acquisitions, and Partnerships: An Insider's Guide to Communications.

Jarrard's book offers key steps for leaders to keep their strategic communications on point when a potential partnership falls through, including the following:

1. Be the first to share the news. "The announcement of a deal going south should be as closely managed as the announcement of a potential partnership," Jarrard writes. "It's not a story that will hold for long, though. Develop your message quickly and move. Cascade your message out to key audiences over the course of a few hours, beginning with your high-priority stakeholders. If it does leak, take control quickly. Focus less on finding the leak and more on getting the message fixed and moving forward."
    
2. Include a concrete "next step" in your messaging. "It's not enough to announce that the deal is dead. Have a 'so, therefore, we're going to ...' statement that finishes with something tangible, even if that next step is studying options for the next 90 days," Jarrard writes. "It's a signal that your leadership is not fretting but instead is already looking forward to the next milestone that will accomplish the goals you need to be strong."
    
3. Explain why the deal failed. "It won't be fun, but the rumor mill will create a story more dire than the real reasons," Jarrard writes. "Remember, you don't have to share or explain confidential details or boardroom politics. That's not really what people want. It is expected, however, that you will share some picture of why the hoped-for marriage didn't occur. Money? Culture? Governance? Regulatory concerns? Moreover, you don't have to attack your former partner to deliver a message that can put the issue to rest so you—and your hospital or healthcare organization—can move on."
    
4. If you have to walk away, do it together. "Joint communications ensure that no one is stabbing anyone in the back on the way out the door. Work together on a common message and, just as important, the timing of its delivery. If you don't, neither party will fare well and be able to take the next steps they need," Jarrard writes.
    
5. Keep a steady rhythm of ongoing communication. "When the partnership was on, you were writing and speaking multiple times a week on the topic. While you may not be at the same frenetic pace if the deal is off, you still need to communicate. One week, one month, a few months down the road, people will want to know what's next," Jarrard writes. "Even if you have not yet identified the right next solution, tell them that. Sharing a message that contains no new news carries a message that you are in control."
    

Keep in mind, Jarrard writes, that various stakeholder groups may have differing views on the merger, so don't be surprised if some of them celebrate what the senior leadership team views as a loss.