A shift to value-based care and abundant cash in the market drive healthcare M&A activity. As a result, buyers can gain an edge by hiring a transaction advisor.
However, the financial projections many of these deals are built upon may fail buyers due to inflation and varying revenue on a cash versus accrual basis.
Strategic Planning
Strategic planning is a process to determine an organization’s course over time. During the planning process, committees work together openly and transparently. Ideally, the planning committee comprises a mix of internal and external experts. The goal is to develop a plan that anticipates and addresses challenges and opportunities for the future, with realistic objectives.
Less than a decade after the frantic merger activity of the 1960s, we are again amidst a major wave of corporate acquisitions. Amid a weak economy, many companies seek to accelerate growth by purchasing other companies.
New York state law requires that healthcare entities notify the Department of Health (DOH) of any material transaction. The notification must include a statement describing the expected impact of the transaction on “cost, quality, access, and equity” in the affected markets and any commitments by the entity to address those impacts. The DOH must review and approve these transactions, a significant change from the previous practice of having the entity submit a certificate of need application to the DOH.
Financial Analysis
Financial analysis involves recording and analyzing accounts and financial ratios to evaluate a company’s results, performance and trends. Those findings are then presented to upper management, helping them make significant decisions like investment and project planning activities.
Developing estimates that project a target’s cash flow contribution is another key part of the financial analysis process. This can include assumptions about how the target’s business will perform following the acquisition, such as the impact of increased market share or benefits from synergies.
A target’s financial statements should be thoroughly analyzed for any accounting issues affecting the deal. For example, US GAAP allows acquired subsidiaries to use pushdown accounting (a procedure that recognizes a subsidiary’s assets and liabilities at fair value after the change-in-control event) if it benefits the acquirer. However, this should be carefully weighed against the additional administrative costs that pushdown accounting can entail.
Regulatory & Compliance
With the healthcare industry undergoing unprecedented consolidation and M&A activity, it’s critical to anticipate regulatory hurdles. Ensuring compliance with the aid of Healthcare Transaction Advisory is also crucial, particularly in regulated industries like pharmaceuticals. Licensing is often required on the federal, state, county and city levels. And with a growing number of states taking action to impose new review processes and disclosure requirements for material healthcare transactions, businesses should prepare for increased scrutiny going forward.
For example, Governor Cuomo recently signed legislation in New York requiring the Department of Health (DOH) to review and post a summary of certain healthcare transactions on its website. This law aims to provide transparency to consumers and stakeholders. It will result in an extensive review of transactions that may have escaped the scope of other states’ review processes.
Negotiation
The negotiation phase is a delicate and often time-consuming process. Novice teams often bring too many outstanding issues into the negotiating stage and attempt to resolve them all simultaneously, running out of time and opening the door to rival bidders. Experienced acquirers, on the other hand, focus their efforts on the most important aspects of the deal and use the rest of the time to negotiate concessions from the target’s management team.
In the wake of the COVID-19 pandemic, buyers may seek more time for incremental due diligence (for example, assessing whether the target’s line employees have been affected by the pandemic). They also might demand greater levels of normalized working capital to help assure post-closing viability. Further, they might insist on longer periods of exclusivity to avoid the threat that a buyer’s competition will take advantage of an open market for the acquisition. This will put upward pressure on indemnity escrows and holdbacks.
