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Invasive procedures: Making merger integrations work in health care

Success in add-ons hinges on anticipating the needs of people and IT


Among the many value-add strategies in the private equity toolkit, the buy-and-build play is among the most effective. The combination of several businesses opens up new markets, creates new products and services, and often elevates purchase price multiples. Not surprisingly, roll-ups are among the most difficult tools to handle, merging numerous companies with each other and integrating their people and processes is fraught with risk.

The U.S. health care market is particularly ripe for private equity buy-and-builds, with fragmented markets and undermanaged care providers looking for paths to growth. With data accessed from PitchBook, the below graph illustrates the prevalence of add-on acquisitions as an overall percentage of health care buyout deals.

U.S. health care add-on deals by quarter

While most merger integrations are challenging, private equity investors argue that many health care companies present unique complexities. First, doctors and other health care workers are highly trained and critical to operations, so retaining and motivating them is critical.

Secondly, many legacy companies have antiquated IT that is not easily dropped into more sophisticated operations. As with almost every other industry, the health care industry is being swallowed whole by technology, and the best private equity sponsors see technology transformation as key to their investment theses.

According to Silvia Hidalgo, practice leader in the mergers and acquisitions in health care and biotech areas for RSM US LLP, a successful merger integration begins before the deal is struck with careful due diligence. “You need to understand people, process and technology,” she says.

Starting with people, Hidalgo says, “The goal is to get top-of-the-line physicians, while ensuring the best physician productivity, and the best physician compensation packages. What is the physician alignment that you are putting in place? What is the type of billing used to maximize the operation, but at the same time, ensure that you get the best fees for your physicians?”

In a buy-and-build strategy, it is important not only to understand the talents and incentives of the people being acquired, but whether or not a cultural integration can take place. Clashes between corporate cultures can sometimes lead to the failure of the merger in that key talent departs, according to Joseph Ring, director and complex delivery lead at RSM US. “The tone needs to be very strongly set at the top for creating a solid culture,” says Ring. “Buyers need to carefully assess what the acquired culture and leadership is like to ensure there's not a delusion of a good positive culture. The health care business is very high-intensity, and at the same time it's usually very tight in terms of resources, or extra capacity, and so a loss of a critical resource due to a mismatched culture could have a very high impact on the business.”

A large percentage of M&A activity within health care today is driven by technology, specifically one party seeking to transform its operations with the technology owned by the other party. This tech integration, therefore, is central to the investment thesis. Hidalgo says that where she has seen failed merger integrations, problems with the integration of IT or technology are usually central.

Ring notes that doing an acquisition is not the only way that legacy companies are leveraging new technology to improve their businesses. “So rather than investing in their technology, there could be an opportunity for a greater adoption of outsourced business processes, or outsourced technology providers. This might be a way to minimize an initial investment in the business.”

Hidalgo agrees: “We’re seeing joint ventures and partnerships, too. A hospital might not want to fully commit to making a multimillion dollar investment in a technology integration, but will actually start with a multiyear partnership with a health care IT provider.”

Finally, a key to merger integration in health care, as in any industry, is to have a clearly identified change management team active from the very beginning of the process. In many cases, while the CEO needs to set the tone for the entire organization, he or she doesn’t have the capacity to lead change management.

Sometimes the operating partners at the private equity sponsor lead this role; sometimes a third-party consultant is brought in. Regardless of who takes the lead, someone or some team needs to be in charge of this critical role. Says Ring, “Establishing the processes of change management early is something that creates a very positive outcome for the business. People will generate their own story around what is happening. You can highlight an ongoing scheduling of key change elements within the business, so as systems are transitioned, as people are transitioned, as processes are improved, those change communications can really drive engagement by the overall staff.”

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