Moran said buyers are using acquisitions as a primary tool to recruit talented leadership teams and front line workers. He stated that there’s never been a greater emphasis on the human capital at target firms. Yet at the same time, rising compensation costs are crushing already-thin profit margins at some companies who as a result have a hard time pulling off a sale.
M&A Market Faces Choppy Period in Face of Changed Risk Perceptions
Buyers and sellers of healthcare businesses face new roadblocks to closing deals.
Geert De Lombaerde
Healthcare Innovation
Talking points have changed. The fervor has cooled. The due diligence has intensified. Health care organizations active in the mergers-and-acquisitions market are facing a number of notable changes as they enter the second half of 2022.
Yes, investors of all stripes still have billions of dollars of capital to put to work, many healthcare ventures are generally less affected by financial market swings, and, in the words of Venable law firm partner Ari Markenson, “I don’t know of advisors who are twiddling their thumbs.” Good deals for good companies will still get done.
But the aftermath of COVID-19 and the changing climate in financial markets are throwing up roadblocks that are hampering deal activity even though longer-term fundamental tailwinds such as the shift to outpatient settings and technology enablement remain in place.
“Our world is changing and I think the next 12 months are going to be very different than the past 12 months. I’m not bearish […] but I do think everyone is adjusting their risk tolerance and valuations are going to plateau and begin coming down,” said Burk Lindsey, who leads Raymond James Financial Inc.’s roughly 50-banker healthcare services team. “A+ deals are still going to get done but the Bs and B-minuses and C-pluses, some of those are not going to get done. And the ones that do get done will take longer. And it’s going to hurt. It’s just going to be more challenging.”
One important point to note about tracking consolidation in healthcare is that megadeal activity, which can mask much of the action among small and midsized companies, already has cooled. Research firm Kaufman Hall & Associates noted this spring that the average size of healthcare firms sold in the first quarter of 2022 was $246 million. That was less than half 2021’s record number but also more than 30 percent smaller than the average seller’s size from 2016 to 2020.
The market’s most prominent and expensive transactions now also have to deal with more aggressive stances at the Federal Trade Commission and U.S. Department of Justice, which have both challenged a number of planned healthcare mergers in recent months. But middle-market firms who hire Lindsey and his peers don’t have to concern themselves with antitrust matters and activity is on the whole still at a solid level – especially after the market digested a rather manic end to 2021 deal-making because of expected tax law changes.
“I’m not to the point of hysteria,” said Mike Moran, co-founder of M&A Healthcare Advisors in Los Angeles. "I think we’ll be back in a good place by the third quarter or fourth quarter.”