Understanding Mergers and Acquisitions in Behavioral Healthcare
Michelle Davis, DBH, Assistant Director of the DBH Program, Cummings Graduate Institute for Behavioral Health Studies
Mergers and Acquisitions (M&A) refers to the purchase, consolidation, or restructuring of companies. Acquisition occurs when one company assumes more than 50% ownership of another company, this is the most common type of deal. When two companies are joined together to create a new company this is referred to as a merger, this happens less often (Snow, 2018).
For any transaction (the legal terminology for a deal) to take place there must be a buyer and a seller. The buyer is the acquirer, and the seller is generally referred to as the target company, during the M&A process. The terms buyer and seller are the legal terms that will be used when contract documents are executed. The “Buyer” of a company can come in many forms; Strategic Buyers are often looking to acquire a company with the intention of combining at least some part of the target company, while Financial Buyers are often Private Equity (PE) funds (large pools of money often from many sources), there may even be companies that are financially backed by outside PE money, and finally there are occasionally individuals who purchase companies, however, this is rare (Snow, 2018). The “Seller” of a company could be looking to obtain growth capital (raise money to invest in the business), recapitalize (sell part of the company but retain control), sell more than 50% to allow a change or control, or sometimes the seller is interested in only selling one division, brand, or certain assets, this is referred to as divesting.
M&A steps that occur along the way to a deal (Corporate Finance Institute):
- The development of an acquisition strategy by acquiring companies
- Strategic growth to be acquired with high value for target companies
- Determining search criteria for potential acquisition/target companies
- Assessing and value analysis of target companies
- M&A due diligence
- Deal Closing
Each of the steps listed above are a general overview of an entire process and contain their own specific nomenclature. For example, when valuing a company an important term to know is EBITDA, this refers to earnings before interest, tax, depreciation, and amortization. Basically, the entire cash flow cycle of a business. This calculation is often used to determine the value of the company, making it important in negotiations; banks may want to know the EBITDA when considering a loan.
The due diligence phase is a very complicated process usually attended to by executives, attorneys, accountants, and bankers. Due Diligence process ideally addresses all elements of the contracts/deal structuring, financing, closing, and integration. A Due Diligence Checklist may have more than a hundred items on it requesting information on the corporation, operations, financial information, real estate holdings and other assets, inventory, purchasing, supply, intellectual property (IP), human resources, strategic plans, debt, financing, leases, etc., (Snow, 2019). The list can be exhaustive, and this particular step is very time consuming.
Once the steps associated with making the deal happen are completed, the deal is signed, and the money is transferred, the attorneys, bankers, and accountants have concluded their work and usually end their involvement. This is when the work associated with the process of integrating the respective companies begins.
Integration is a critical and often overlooked part of the entire M&A process. Sadly, many companies do a poor job with this process, and as a result many deals fail to reach their anticipated goals and synergies because of poor integration.
Lake Capitol (2017) reports in that, “according to collated research and a recent Harvard Business Review report, the failure rate for mergers and acquisitions (M&A) sits between 70 percent and 90 percent”. Reasons given for this failure rate include rushing due diligence, not adequately addressing corporate culture and power issues, over estimating the respective integration team’s ability to collaborate, undervaluing opinions and insights from lower-level managers.
When deals succeed in reaching the synergies and results that were hoped for it is usually due to proper and thoughtful handling of the post-merger integration process, including addressing organizational culture differences, comprehending and embracing the value added by the new company, and leadership being more focused on the next steps with integration less concerned about the excitement and public attention the deal may attract (Success and Fail Rate of Acquisitions, 2017).
In the second part of this series we will do a deeper dive into M&A in behavioral health. There has been a significant amount of M&A activity in the behavioral health space in the past few years, and industry analyst anticipate this trend to continue into 2019 and beyond. It is likely that individuals working in integrated care may be impacted by this.
M&A Process - steps in the mergers & acquisitions process. (n.d.). Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/deals/mergers-acquisitions-ma-process/
Snow, B. (2018). Mergers & Acquisitions for Dummies. Hoboken, NJ: John Wiley & Sons.
Success and fail rate of acquisitions. (2017). Retrieved from http://lakeletcapital.com/blog/2017/3/15/success-and-fail-rate-of-acquisitions