The Changing Face of M&A
Published: Wednesday, August 10, 2016 10:59 am
For better or worse, mergers and acquisitions are on the rise thanks to today's rapidly changing regulatory environment.
New payment models are encouraging scale and collaboration, as noted in the proposed Anthem-Cigna and Aetna-Humana mergers. The deals have drawn skepticism from consumer advocates, healthcare provider groups and lawmakers, with many betting on anti-trust regulators to pull the plug on the sizeable proposed transactions. And indeed, at press time, the U.S. Department of Justice had just filed requests for preliminary injunctions to block both deals citing anti-trust issues.
So just what does it take to make a deal work? Experienced CEOs weigh in on the good, the bad, and the ugly behind the complex world of M&A.
Centerstone: A Model in M&A
Centerstone of America CEO David Guth, Jr., has written the book on M&A. Literally.
The author of Strategic Unions has served as CEO of the not-for-profit, community-based behavioral healthcare organization since 1991. Now one of the largest such providers in the nation, Centerstone is the result of a series of mergers beginning in 1997 involving 11 formerly independent organizations.
Recently, the company just completed its 16th major industry merger, with a few smaller ones along the way. Following finalization of their March affiliation with Kentucky's Seven Counties Services, Centerstone will boast 181 locations in Florida, Illinois, Indiana, Kentucky and Tennessee, with more than $320 million in annual revenues and some 4,500 employees (with another 750 contract therapists nationwide). The deal marked Centerstone's third merger within a year.
"The common thread in any affiliation or merger should first and foremost be looking at the management team, followed by values and complimentary strengths," Guth said. "When you take on an affiliation or merger, you're blending cultures, and it's perfectly okay if it comes with different perspectives and ways of doing things." However, he continued, "If you don't come at it from common values, you find yourselves at cross purposes."
Different is Good
Mergers should be considered with the overall goal of growth and market diversification rather than simply the financial bottom line. Guth encouraged CEOs to not be "overly narcissistic" in looking at potential partners, as many have similar values but different strengths and skill sets.
"The real opportunity is to find folks who bring different skill sets," Guth said. "If you're getting an organization with complimentary strengths, you look at what synergies are created by bringing the two together."
PhyMed's Success Story
Sometimes that means thinking outside the box.
Nashville-based PhyMed was established in 2012 by Anesthesia Medical Group and financial partner Excellere Partners. When AMG needed access to more capital to build scale beyond Middle Tennessee, Excellere Partners sold their position to the Ontario Teachers' Pension Plan, which manages $150 billion in net assets.
"OTPP had targeted the anesthesia physician practice management sector, and PhyMed was a compelling investment opportunity," said PhyMed President and CEO Sami Abbasi. "It's a true partnership. The investment professionals at OTPP have deep healthcare experience and understand our vision and strategy and support us with the capital to execute."
Abbasi, who joined PhyMed in 2015, is now partnering with leading anesthesiology groups nationwide to help them adjust to the complexities of healthcare and achieve market growth. "We're in growth mode, and acquisitions are a big value driver for us and our physician partners," he said. "It's the most pronounced way we grow."
PhyMed has also grown organically though the hospitals they support. "My advice is to be really clear about your objectives and to have a post-acquisition integration plan," said Abbasi, a healthcare veteran experienced in M&A transactions.
"Oftentimes what makes mergers and acquisitions unsuccessful is that, while they might make a ton of sense on paper, little thought is given to the cultural issues and who's responsible for what after the deal closes. There has to be a lot of thought up front, including difficult conversations around roles and accountabilities."
The Art of Nonprofit Mergers
In the for-profit world, companies must perform an analysis of benefit-to-acquisition costs and look for partners with complimentary strengths. Nonprofits, however, present a unique opportunity to bring organizations together without the typical acquisition costs.
In fact, Centerstone's 16 major M&As have happened without a single purchase. Guth envisioned the transactions as "healthy marriages" rather than business acquisitions. "In buying a nonprofit, the fair market value has to be paid to a residual nonprofit entity; but if you marry them, all the assets and strengths of both come together," Guth explained.
"Other than transactional expenses, there doesn't have to be an acquisition expense." That type of transaction requires designing the organization for strength in fulfilling its mission post-merger rather than jockeying for roles for individuals. "It's part of a broader plan, to fulfill our growth with specific ends in mind, and look for the intersections between interested and interesting organizations," Guth explained. "That's always the key. In the nonprofit world, there's no such thing as a hostile takeover."
CPA Point of View
Vic Alexander, chief manager of KraftCPAs, is often involved in M&A deals early in the process to help analyze price, ROIs and perform modeling and sensitivity analysis: What happens if things don't work as expected?
"The M&A process starts with a potential suitor, and the potential seller enters into a non-disclosure agreement with information being exchanged," Alexander said. Next, the potential suitor returns with a binding letter of intent, and both parties start working toward a definitive agreement that involves a lot of due diligence on both the seller and buyer.
"A big red flag is when I see parties that don't negotiate in good faith," Alexander said. "In many cases, the seller and buyer will be working together after the transaction; and if someone's not acting in good faith during this phase, I'd be very leery as a seller about getting what you expect in the transaction."
Guth agreed. "A merger between two strong partners creates enormous benefit with visibility, competency and the ability to retain top-notch talent," he said. "It can't be taken on lightly and must be administered with great respect and attention to detail."