Recently, we were asked to participate in a virtual panel—hosted by our friends at Jarrard Phillips Cate & Hancock—regarding the impact of COVID-19 and the election on healthcare mergers and acquisitions. Check out the panel’s expert opinions here.
In our decades of hospital consulting experience, we know that no two healthcare M&A transactions are alike. So how do you go about finding the best transaction for your organization? Here are the four questions you should ask – and answer – before you ever have the first M&A conversation: why, what, who, and when.
Know the Why
We believe strongly that an organization should not pursue an affiliation simply because everyone else is doing so. Rather than a lemming healthcare strategy, you should first clearly articulate the primary reasons—your criteria—for pursuing a transaction. Are you strapped for capital? Do you need help improving quality performance? Do you need a deeper bench of subject matter experts, such as those with expertise in healthcare transformation? A recently completed strategic plan is often the ideal source to help answer these questions. If you don’t have a fully developed strategic plan, a Rapid Strategy Summit before beginning your affiliation journey can accomplish the same purpose. Your criteria then should serve as the foundation for the entire process going forward.
Know the What
Once you know why you want to pursue an affiliation, you then need to understand what affiliation structure—or range of structures—is best for your situation. If you need capital, it is highly likely that you will need to seek out a more integrated structure, such as a long-term lease or merger/acquisition. If you need access to subject matter experts or quality programs, a looser structure may be an option.
The “what” also means a clear understanding of your current legal structure. What authority is required to make changes and do those requirements differ depending on the affiliation structure you choose? Is a simple majority vote of your existing board all that is needed, or are you required to undertake a public bidding process? If a political body is involved in approving your transaction, developing a communication strategy must coincide with the “knows” outlined here.
Know the Who
Often, this is where organizations naturally start the process because they already have a relationship at some level with a likely partner candidate. However, to ensure the process is as objective as possible, we recommend undertaking an objective analysis of likely partners’ track records based on your specific criteria (the “why”), before initiating even the first conversation.
While cultural compatibility can dramatically ease integration and should always be considered, it is critical that you pursue a partner who can actually fulfill your criteria. And, when considering cultural compatibility make sure that you explore the culture of the organization, not just the leaders with whom you are talking. While leaders heavily influence culture, those leaders may be gone before your transaction is even complete, so you want to make sure that the success of the future relationship is not dependent on a single person.
Know the When
It is rare to find an organization that has explored an affiliation too soon. Unfortunately, the opposite is true all too often, especially today. Rather than pursuing affiliation as a deliberate strategy, some organizations wait until their performance (usually financial) is suffering and the old, tried-and-true methods of turning things around are not working. In years past, a poor financial position may have limited an organization’s options, but there were usually more aggressive systems looking to grow and willing to take on a risky acquisition.
Today, systems are much more risk averse, given rising capital needs for their existing infrastructure, as well as the inherent risk associated with participating in transformed payment models while simultaneously re-tooling for elements of care delivery transformation—not to mention the impact of COVID-19. Unless it is a nearly perfect strategic fit for such a system, a poor-performing organization may find limited, or even no, interest by potential partners.
For many healthcare organizations, an M&A transaction is a once-in-a-generation experience. Advance preparation is critical to ensuring that you are making the best decision for your organization and your community—you must first know the “knows” outlined above. While a transaction should not be a battle, Sun Tzu in The Art of War sums up the importance of planning for this momentous event:
"If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle."
