The 6 Best Ideas from 50 Top Healthcare M&A Advisors
I recently attended the Winter Conference of the Alliance of Merger and Acquisition Advisors. During this three-day event, I attended and contributed to over 50 meetings where these real-world experts discussed the state of healthcare M&A.
Here’s what these experts had to say:
1. Obamacare isn’t going away soon.
A key topic of discussion was the planned repeal and (possible) replacement of Obamacare, as the Affordable Care Act (ACA) is known, would play out.
There did not seem to be a consensus on the issue. The general hope seemed to be that leaders could be convinced to keep the positive parts of the ACA (e.g., extending coverage to those that previously were uninsured), while replacing the negative aspects (e.g., strengthening the exchanges).
Most participants felt it would be difficult to put the Obamacare genie—or whatever succeeds it—back in the bottle. In other words, that the prevailing focus on reducing costs and improving outcomes is most likely here to stay.
2. Trump might be good for business.
The Trump administration had been in power for less than 10 days at the start of the conference. And what a rocky ten days it had been. The prevailing sentiment toward the new administration among a meaningful number of advisors was one of cautious optimism.
This optimism stemmed from the hope that one-party control of both the executive and legislative branches of government would lead to more business-friendly policies, especially about tax cuts and decreased regulation.
However, there was some caution expressed about current level of partisanship in the country and the perceived lack of specifics provided by the new administration on a host of issues.
3. Private equity is a likely winner.
Everybody agreed that the general level of interest rates and the stock market were crucial barometers of the business climate going forward.
Some experts expressed concerns that continued rate increases by the Federal Reserve would be bearish for healthcare M&A, because higher rates would make it costlier for investors to buy healthcare businesses. Others noted that interest rates continue to be historically low, however, and that the market could absorb some near-term increases before valuations were materially impacted.
Possibly the most interesting observation, though, was that as the stock market continues to show volatility, investors will turn to private equity as an asset class. Indeed, many of the private equity groups that I spoke with had recently completed a successful round of fundraising. A couple had managed to raise over $300 million from investors.
4. Investors are getting more creative.
The high level of cash reserves has led to considerable competition among buyers of healthcare companies. Because of this, many of today’s buyers are more willing than they were in the past to take a minority stake in a company, while others are opting to lend money in the form of mezzanine debt financing to facilitate a transaction.
Meanwhile, the increased competition is driving transaction prices higher. While this has obviously been good for sellers, it raises questions as to its sustainability going forward. Some of the investors I spoke with mentioned that they were starting to invest more to grow their portfolio companies organically, mainly via de-novo initiatives.
Probably because there are other options available, some experts expressed that they were increasingly reluctant to participate in ultra-competitive deals. “We are not chasing bank deals anymore,” said one investor. “We are not loving auctions.”
5. Platforms and add-ons are in demand
Many financial sponsors have increased their focus on the lower middle market because of the above factors. Their goal: To find meaningful platform companies that enable them to deploy their cash reserves.
Most groups I met with were looking for platform companies with a minimum of $3 million in earnings before interest, taxes, depreciation, and amortization (EBITDA), a 10% margin, and a history of consistent earnings growth and/or stability. Some of the smaller players in the space were looking for platforms with a minimum EBITDA of $1 million.
As is to be expected, not all healthcare verticals were equally in demand. Generally, investors were divided between those with an appetite for reimbursement and compliance risk and those who were not.
6. Cost savings and improved outcomes are key
Throughout the discussion of M+A opportunities, there was a clear preference for healthcare companies that either help control cost or improve outcomes, such as lowering readmission rates, reducing emergency rooms visits, and so on.
We’ve certainly seen that at Vertess, where we have active or emerging deals in urgent care, dermatology, home health agencies, and behavioral healthcare deals that have received significant interest. Such post-acute companies are generally seen as helping on both the cost and outcomes fronts.
The other notable verticals that attracted attention were business services that support the healthcare complex. Such businesses include healthcare I.T. and healthcare information management companies that provide both the infrastructure and the data needed to monitor costs and improve outcomes.
For savvy healthcare investors, the “best” companies appear to be those who not only effectively partner with companies outside of their traditional setting to improve outcomes but also use big data to measure the improvement and cost savings.
Written by VERTESS Managing Director Luis de la Prida
About VERTESS
VERTESS is an international healthcare-focused M + A advisory firm with expertise in diverse healthcare and human service verticals, ranging from behavioral health and intellectual/developmental disabilities to healthcare IT, DME, home care/hospice, urgent care, life sciences and other specialized services and products.
VERTESS is headquartered in Tucson, Arizona, with additional offices in Phoenix, Dallas/Ft. Worth, New York and Mexico City. For more information visit www.vertess.com.