The Executive’s Guide to Healthcare M&A: Part III
Once you know what capability gaps you want to fill through acquisition or external collaboration, finding the right partner is critical. Choose badly and you’ll have wasted enormous resources of time and money. This article discusses five steps to identify and prioritize a set of potential healthcare M&A partners most likely to help you realize your performance objectives.
In previous posts, we talked about why M&A is inevitable for you as a healthcare payer, provider or supplier to the industry and how it can speed up the realization of your goals. Once you’ve defined the objectives of your M&A strategy, it’s time to identify and prioritize a list of potential partners that have the capabilities you need.
The challenge, of course, is that reaching an agreement with a partner who is an exact match to all of your requirements – and that also fits your acquisition budget – is unlikely.
Here are 5 steps to find the “best” possible match.
1. Review, Value and Prioritize Your Capability Gaps
Your capability gaps or reasons for considering M&A will typically fall into the following categories:
- Market Share
- Enhanced Product or Service Portfolio
- Complimentary/Adjacent Products or Services
- Marketing/Sales Capability and/or Reach
It is critical to define specific acquisition objectives in any relevant categories and assign a dollar value to each objective to support prioritization.
For example, how many dollars revenue are you planning to add due to increased market share, new or enhanced products or services, or additional marketing and sales capacity and/or reach? How many dollars do you hope to save by acquiring talent already performing well in operating roles or by leveraging existing operational infrastructure?
2. Set Budget and Capital Targets
To some extent, setting an acquisition budget can be a chicken and egg question. Access to capital is often related to the cost of that capital compared to the presumed return on the investment, accounting for all acquisition, transaction, and integration costs.
But realistically, basic factors like enterprise size, industry segment, and management track record largely determine the available acquisition budget. You have to establish what resources you have available to work with before searching for a healthcare M&A partner.
3. Define Your Acquisition Search Plan
This step is the most critical to your acquisition initiatives and the key to avoiding potentially catastrophic waste of time and money.
The acquisition search plan matches prioritized M&A strategy objectives with available/attainable resources to define the potential paths forward.
Define multiple acquisition scenarios
You need to define multiple realistic possible combinations of objectives and resources called acquisition “scenarios”. These are essential to address the reality of what is actually available in the universe of potential acquisition partners.
For example, your objectives may be at least partially achieved by acquiring a company that can provide market share in the northwest United States while concurrently adding a complimentary product to your portfolio. Your secondary objective might be to leverage powerful new IT support system that is already operational – thus avoiding a long system acquisition, testing, and implementation cycle.
In this example, you would define a scenario that targets specific organizations addressing these objectives while ensuring they’re of the appropriate size and value to fit within your acquisition budget constraints.
When evaluating potential partners it’s important to be prepared to think outside-the-box. You probably won’t find a partner that matches your “ideal” scenario. Having multiple optional scenarios gives you a better chance of finding acceptable partners for sale.
Now you have to decide which scenarios to look for first.
Define steps to consolidate and integrate operations
For each scenario you should define – at some level of specificity – those steps and related costs necessary to realize your objectives post transaction through appropriate consolidation and integration planning. This operational due diligence ensures any potential partner can be properly assessed for the appropriate “fit”.
Determine target price range for each scenario
Finally, assign a target value to each scenario considering the expected benefits minus expected transaction costs plus the cost of consolidating your operations post transaction. This value is used to determine a target price range for each scenario. The price range has to be doable given your acquisition budget.
4. Search for Potential M&A Partners
You now have your multiple optional acquisition scenarios which can be prioritized for your partner search based on total value assuming your target price for each.
Realistically, you probably already have some partners in mind. Build on that list with the intent of discovering 3-6 best candidates – defined as best matches to your scenario parameters – worthy of further research. It’s usually appropriate to consider competitors as they are most likely to be supplementary or complimentary to your current capabilities. But there may be many excellent candidates you never heard of as well.
This work is usually most efficiently and effectively accomplished by resources who are “in the market” with many relationships and familiar with a large number of organizations. Using a third party for this work offers advantages and opportunities in terms of gathering critical information to inform transaction planning and pricing.
Most acquisitions fail to meet their objectives. Usually this is because insufficient attention was paid to planning to deal with operational issues (business process integration, technology capacity and quality), and people issues (leadership style, culture, staff expertise, etc.). Be sure that whomever you choose to assist you in M&A partner identification is well versed in these issues as well as the more traditional financial evaluation.
5. Define Finalists
Invest the necessary resources in comprehensive financial and operational due diligence in 3-6 candidates in order to identify 2 or 3 final M&A partners in priority order. This is the point at which it’s necessary to get under the covers, usually with non-disclosure agreements, to get access to the necessary detail to inform final deal parameters. It’s also the point at which it makes sense to expand your acquisition team to add legal and financing expertise to industry specific financial and operational expertise.
Following the approach outlined above will put you in an optimal position to successfully complete a transaction with high potential for realizing your strategic acquisition objectives. That will only happen with effective consolidation and integration after the deal is completed. In our final article in this series, we’ll share some best practices for accomplishing the “merger” part of M&A.