Volume 5 Issue 5, February 27, 2018
Today, financial buyers, especially private equity groups (PEGs), are competing pedal-to-the-metal with strategic buyers for quality healthcare IT deals. Healthcare IT companies are at the forefront of these heated competitions, as they seek all-time-high valuations from financial and strategic pursuers alike. While strategic buyers look to capture immediate synergies with acquisition targets, PEGs often do not have that luxury for their platform investments. This disparity can leave a gap in valuations between the two types of buyers.
What competitive advantage does that leave the PEGs looking to acquire a high-priced healthcare IT business? The answer should be of interest to healthcare IT owners/investors - they can actually offer a more robust value proposition as follows:
1. The Whole Brand Enchilada
PEGs are investing in the total prospects for a healthcare IT entity, not just the upside of the future profits, and embrace the upside of the company as a whole. They are more likely to share the vision of the company as a brand, where as a strategic buyer will typically absorb the company as another product or service line. This nearsightedness often constrains the ultimate value and sustainability of a healthcare IT enterprise.
2. Team Continuity
PEGs are generally investing in the leadership team, as well as the company’s results. They value a company that has a stable and competent team that they can trust with the future of the business. With a strategic partnership, the likelihood of keeping 100% of the team is often a challenge because of the buyer’s dominant culture. Additionally, with PEGs the ownership/management team will be expected to “rollover” a percentage of their equity, which is an effective way of keeping the principals in tune with the financial buyer’s interests.
3. Sophisticated Money
PEGs are particular with their investments and there is a reason why. Long before a target is identified for a potential deal, investment parameters have been set for their dedicated fund. The seller must meet the requirements in a vetting process to ensure that the PEGs investment mandate aligns with the targeted company.
4. Growth Opportunities
Once a transaction is consummated, additional growth opportunities are always identified with PEGs. A healthcare IT company looking to keep their identity, yet increase their operational effectiveness, will typically see immediate process and systems improvements introduced. Additionally, new growth opportunities may also be found in the PEGs partners, which could include insurance providers, hospital systems and other healthcare industry stakeholders, who can (and will) introduce new IT opportunities to the company.
5. The Second Bite
The “second bite of the apple” refers to the proceeds sellers realize when their company is sold a second time and they cash out their remaining equity in the process. This can be particularly beneficial to healthcare IT companies that are growing rapidly with a meteoric value trajectory. The second bite approach allows for an exit strategy to be formulated early in the process, with a balance of risk mitigation and greater future value to the seller’s benefit.
6. Likelihood of Close
The likelihood of close is increased in many financial buyer transactions, especially with healthcare IT companies. The structure of the deals tends to require creativity and flexibility in negotiations, which is a clear advantage for many financial investors compared to strategic buyers. PEGs may have investment return goals, and how they get there is often open to multiple paths.
We always urge healthcare IT owners to take the long-term view of their value. They may attract a bigger initial offer from a strategic buyer that is attractive. But if they look at the full value of what can be attained in a financial buyer’s proposal, they may see a more exciting proposal that stokes their excitement about the future.
For over 20 years, Brad has held a number of significant executive positions including founding Lone Star Scooters, which offered medical equipment and franchise opportunities across the country, Lone Star Bio Medical, a diversified DME, pharmacy, health IT, and home health care company, and BMS Consulting, where he has provided strategic analysis and M+A intermediary services to executives in the healthcare industry. In addition, he is a regular columnist for HomeCare magazine and HME News, where he focuses on healthcare marketplace trends and innovative business strategies for the principals of healthcare companies. At VERTESS, Brad is a Managing Director and Partner with considerable expertise in HME/DME, home health care, hospice, pharmacy, medical devices, health IT, and related healthcare verticals in the US and internationally.