Volume 6 Issue 4, February 26, 2019
Over the past few months, as 2018 wound down and 2019 kicked into high gear, we've seen a steady flow of reports analyzing U.S. healthcare merger and acquisition (M+A) activity from last year and outlining predictions for this year. Let's examine what these reports identified as some of the key developments of the year that was and forecasts for the year that is and then discuss what it all means for your business.
… big transactions and many transactions. As a Kaufman Hall (KH) report notes, there were seven transactions involving sellers with net revenues of at least $1 billion. Business Insider, using Refinitiv data, identified some of the biggest healthcare deals of 2018, which included Cigna's acquisition of Express Scripts and Celgene's acquisition of Juno. Also on the list: KKR's acquisition of Envision Healthcare — the largest private equity deal in healthcare 2018, according to a Forbes report.
Furthermore, KH notes that the size of sellers likely reached a new high. Their average revenue size, which has been growing at a compound annual growth rate of nearly 14% since KH began tracking the metric in 2008, reached $409 million in 2018.
Also growing in 2018? The total number of transactions. A PricewaterhouseCooper (PwC) report noted that there were 1,182 deals completed — a more than 14% increase over 2017. What wasn't so big, according to the same report: the total value for all deals completed in 2018. Coming in at $121.5 billon, that's a more than 31% decline compared to 2017, but still 1.4 times higher than 2015 and 1.7 times higher than 2016.
A few subsectors played significant roles in driving the number of transactions and their value, according to PwC. Behavioral care led the way in volume and value year-over-year (YoY) growth, increasing nearly 53% and 142%, respectively. Long-term care was the largest subsector by deal volume, coming in at 412 transactions — a more than 34% growth in YoY volume. Hospital YoY volume dipped a bit, but its YoY value surged more than 107%. Notable declines were seen in managed care and rehab YoY value (down about 97% and 87%, respectively) and rehab and labs, MRI and dialysis volume (down about 20% and 16%, respectively).
Finally, as PwC noted, deals continued their trend of becoming more expensive, with multiples having sustained increases for seven consecutive quarters.
…continued, elevated activity, albeit with some possible slowdown. This prediction is reflected in the results of a September 2018 Capital One Healthcare survey of more than 120 CEOs, CFOs and other senior executives at healthcare companies and private investment firms. Just 42% expected a higher level of M+A activity in the coming year compared to the previous 12 months; 48% expected the same level of activity and just 1 in 10 respondents expected a decline.
As Al Aria, a senior managing director with Capital One Healthcare, noted in a Modern Healthcare report on healthcare M&A, "I don't think it's plateauing from an opportunity standpoint, I think it's very robust right now. We're seeing record M+A. I think some people might be questioning how much higher it can go, because we're already at such a high level."
The survey respondents remained bullish on the healthcare services sector overall, with about 7 in 10 expecting their business to improve on its performance compared to the previous year. The market segments with the highest growth potential? Nearly half (46%) of respondents chose healthcare IT and 31% chose home health and hospice.
A Deloitte M+A survey of 1,000 corporation and private equity firm executives were bullish on life sciences and healthcare, with 61% of respondents expecting deal sizes to increase in 2019 compared to 36% expecting deal size to be flat.
Law firm Baker McKenzie expects the United States, along with Asia, to be a hotbed of healthcare deals in 2019, noting that, "Thanks to populations with relatively disposable incomes, companies in both regions will try to attract new technologies."
We also can't overlook the fact that, as Preqin data indicated, there was more than $2.1 trillion in global uninvested capital (i.e., dry powder) as of June 2018 — money that the firms controlling this capital are looking to deploy.
However, there are some trends and potential developments that could derail some deals and slow the momentum coming out of 2018. High on the list of what to watch for: a possible recession. In November 2018, Morgan Stanley's research team predicted a 15% chance of a recession in 2019 and a 30% chance for 2020. Fast forward to just last month and you had the Goldman Sachs' research team putting that figure at over 50% for 2019.
The Deloitte survey identifies other potential obstacles to deal-making. These include global economic uncertainty, business-related legislation, rising interest rates and activist shareholder activity. Another important factor highlighted in the survey: disappointing deals. Forty percent of survey respondents stated that up to half of their deals in the past two years did not generate the expected value or return on investment, which may lead to even greater discipline concerning M+A.
For now, at least, optimism for 2019 remains high, as Thad Kresho, U.S. health services deals leader at PwC, stated in its report. "Although 2019 has started with some economic and regulatory uncertainty, a number of signs suggest that interest in deals will continue this year. Corporate and private equity buyers both have access to significant levels of capital, and with double-digit volume growth in some sub-sectors, it's clear that deals are seen as an important strategy in an increasingly cost- and consumer-conscious ecosystem."
If you want to sell your business, now is a pretty good time. As noted, there's a lot of money looking to be spent, between the trillions in private equity and the windfall provided to companies from the Tax Cuts and Jobs Act of 2017. Five of our managing directors — myself included — recently made the case for why healthcare businesses in several different markets should sell in 2019 in a two-part series (access part 1 and part 2).
But just because it's a good time to sell doesn't mean you need to sell. In fact, one can probably make as strong of a case for why you shouldn't sell now as why you should. What matters most is being prepared to sell when the time is right for you, whether that is in 2019, 2020, 2021 or beyond.
What does that preparation look like? Part of it is understanding market trends, such as those discussed above. If you want to secure a strong, fair price for your business, timing is a factor. If getting the most money possible is your primary motivator to sell, timing will be a very important factor.
However, for some business owners, selling to the highest bidder may not make sense. What may matter more is finding a buyer that will pay a fair price but is also a strong cultural fit. Many business owners — and we often see this in the group home market — develop a strong attachment to their clients. It's so strong that when the time comes to sell, these owners say the feeling is like selling their home with their families still in it. In this case, rather than trying to secure the biggest price from the biggest company, it may be more about finding the right fit. This way, an owner can feel good about the exit knowing their legacy will be preserved and clients will continue to receive excellent care and service.
Many entrepreneurs, I've found, tend to have a funny way of approaching owning a business. They start a business, grow it and see success, all the while developing other ideas for other businesses they want to build. Maybe 5-7 years into ownership of a business, these entrepreneurs are ready to move on. A good offer comes along, they sell their business and then redeploy the capital toward one or more of the other ideas.
In healthcare, it's not unusual to see the entrepreneur hold onto the business for decades and eventually only sell when retiring or faced with a divorce, either from a spouse (monetization of the asset) or business partner. The nature of the space often sees individuals drawn to it because of family history, a passion for serving others or any number of other reasons why owning a healthcare business becomes as much as lifestyle as a profession.
Whether one holds onto a healthcare business for five years or 25 years, selling will be an eventuality for most owners. It's a complex process best executed through a careful strategy and thoughtful approach and with proper support and representation. Start gaining a better understanding of what to expect and engaging the people who will help you when the time to sell comes. The more you can do now in preparation, the more likely it is that you will end up with the right buyer for your business and secure a fair price in the process.
Dave's professional work history includes:
He first became involved in the Behavioral Health space because of the disability of a family member. The mission of these companies is both noble and personal to Dave. He helps business owners with the sale of their business, which means getting them the best value and terms. For him, it means thanking them for making the lives of others better.