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Analysis

High Valuations Making Healthcare Deals More Difficult

By Philip Betbeze  
   June 12, 2018

High prices paid for deals combined with exciting new technologies aimed at extracting value are driving acquirers to team up for acquisitions as never before.

Corporate and private equity executives are having a tough time locating merger and acquisition targets in the healthcare sectors as values have ballooned to nearly three times the level of 2015.

New research from phone interviews with more than 100 of these executives from consulting firm West Monroe Partners show a high appetite for deals and a favorable market for sellers.

According to the research:

  • The top challenge in healthcare deal-making is the shortage of attractive targets. There are few targets valued at $100 million or less, and potential acquirers cite difficulty in finding companies with the right technology or products necessary to sustain growth.
     
  • The biggest challenge to healthcare companies over the next one to three years is the fast pace of change in technology.
     
  • Few targets means a greater number of potential acquirers are definitely (31%) or likely (48%) to seek more joint ventures or alliances over the next 12-18 months, versus acquisitions.
     
  • 49% of respondents are dissatisfied with their compliance and cybersecurity due diligence in recent deals: 58% of respondents said they had discovered a cybersecurity problem at an acquired healthcare company after completing the deal.
     
  • Acquirers are paying close attention to targets' ability to manage the transition to value-based care. It's a slow and steady shift from fee-for service, but the transition is a big factor in taking costs out of healthcare.

But the market may be on the cusp of offering more targets due to pressures on top-line growth. Regulatory changes on the horizon mean additional pressure on some companies to maintain top-line growth and some will react by selling non-core assets. One prime example of this would be General Electric's divestiture of part of its healthcare IT business to Veritas Capital, a private equity acquirer, in March.

In the meantime, as buyers wait for more targets to emerge, they're getting creative:

  • Buyers are going upmarket and creating joint ventures with other acquirers to find targets and win deals.
     
  • Mobile tools and data analytics are key technologies at viable M&A targets.
     
  • The best cybersecurity programs are dangerously ineffective without a security-minded culture.
     
  • When it comes to due diligence, the clash between corporate cultures is a larger problem than incompatible IT.

 

Philip Betbeze is the senior leadership editor at HealthLeaders.


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