M&A Part II: Practical Considerations of the Deal
In the hospital space, as in other markets, mergers and acquisitions (M&A) can be fraught with emotion. However, setting feelings aside and concentrating on practical matters—especially unique challenges that are inherent in merging with or acquiring a particular type of institution—are essential to deal-making success.
Such was the message delivered to attendees of “Mergers and Acquisitions: Positioning Your Organization for the Post Reform Environment,” a three-part panel discussion held this past March at the 2012 Congress on Healthcare Leadership in Chicago, Illinois. “There are a lot of angles to look at in doing the deal,” says Alan Zuckerman, FACHE, FAAHC, president of Health Strategies & Solutions, Inc., Philadelphia, Pennsylvania, in kicking off the second portion of the discussion. “Emotions cannot be allowed to get in the way.”
Small rural hospitals, when executing M&A deals, must recognize that no matter what, management will be ceding some control in exchange for perpetuating the institution’s mission, asserts Dolan Dalpoas, FACHE, CEO of Abraham Lincoln Memorial Hospital, Lincoln, Illinois. Dalpoas deems it critical for executives of such hospitals to approach the negotiation process with their eyes wide open, inquiring which powers will be held by the parent health care provider company, and which will be retained by the acquired institution.
The structure of the hospital governance—specifically, whether representatives of the affiliate institution will be automatically appointed or elected to the parent organization’s board of directors and whether the CEO and members of his or her team will be retained by the new entity, and, if so, what roles they will fulfill relative to the parent company’s executives—merits examination as well.
“It’s like driving,” Dalpoas explains. “You need to understand the rules of the road before you get into the car and start moving.”
Communicate, Communicate, Communicate
Communications are not enough, Dalpoas emphasizes. Over-communication among rural hospital executive teams and constituents inside and beyond their walls also is essential as deal-making progresses, so as to diffuse anxieties within the hospital and among members of the community at large. “There will be a heightened sense of anxiety given strong hospital-community ties that can go as far back as 100 years,” he explains.
In 1994, Abraham Lincoln Memorial Hospital became part of the Memorial Health System, Springfield, Illinois, whose other two hospital affiliates encompass Memorial Medical Center, Springfield, an acute care facility affiliated with the Southern University School of Medicine, and Taylorville Memorial Hospital, also in Illinois, a critical access community hospital serving patients residing in and around Christian County.
While the deal with Memorial Health System was in the works, management struck up dialogues between community leaders, physicians, and hospital staff. Such dialogues focused on what the affiliation with Memorial Health System would and would not bring to the table, as well as how it would and would not affect Abraham Lincoln Memorial Hospital personnel. “We talked people through our vision of our future and what we were trying to accomplish, overlaying it with how the changes would jibe with our mission, vision, and cultural congruency,” Dalpoas explains.
Complex Governing Structures
Ann Madden Rice, FACHE, CEO of the University of California, Davis, concurs with Dalpoas about the importance of communication between concerned parties as M&A initiatives progress. She counsels hospitals that are teaming up with academic institutions to prepare to grapple with the complex governing structures of these entities. In almost all cases, she says, “it’s not just the university hospital, but the entire university you will encounter. So, be certain to ask questions as to who is making decisions, how appointments to the board of directors will be handled, etc. Most important, keep in mind that the people with whom one is working on a deal don’t necessarily have the final word on the arrangements.”
Rice says that like engaging in an M&A endeavor with a rural or community hospital, boarding the train with an academic institution such as hers presents unique challenges. For instance, most physicians who practice in an academic setting also have faculty appointments, and there are significant incentives regarding promotion and tenure. Expectations about training may be different than in non-academic institutions, calling for more rigorous programs.
“Although we focus on patient care, education, teaching, and community engagement are equally important and will continue to be so no matter what affiliations are formed,” she asserts.
In a somewhat different vein, Leo Brideau, FACHE, president and CEO of Ascension Health Care Network, St. Louis, Missouri, urges management at all hospitals beginning or in the midst of M&A activities to exercise due diligence as they proceed through the steps. Hiring a professional advisor to assist in all facets of putting together a deal tops the list.
“As a hospital executive, you’ll do maybe one, two, or three M&As in the course of your entire career; it’s not your core competency,” states Brideau, whose company, a joint venture between Ascension Health and Oak Hill Capital Partners (New York City, New York; Menlo Park, California; and Stamford, Connecticut), was formed to provide an alternate funding source for the acquisition of Catholic hospitals and other health care provider entities. “Any transaction will run more smoothly with a professional in place.”
Fair Market Value
Ensuring that fair market value is being obtained also should be a high priority, Brideau contends. He says so-called distressed hospitals are typically valued at 20 percent to 40 percent of net patient revenue. By contrast, healthy hospitals can sell for 80 percent to 90 percent of net patient revenue or, alternatively, be valued at six to seven times their adjusted earnings.
Bear in mind, Brideau observes, that immediate capital needs, funding for pension plans, and the retirement of existing debt generally consume the purchase price of distressed institutions. However, he states, healthy hospitals can frequently set aside cash for a community foundation that can be used for ongoing funding of local health care initiatives.
“Every deal is different, and the price ranges are current industry norms rather than Ascension’s figures,” the executive says, adding that it behooves hospital executives contemplating a sale to consider whether they want to offer their institution for sale on the open market or do some homework, then solicit bids from a smaller, preferred group of systems.
Limiting the pool of potential purchasers often turns out to be the best option, Brideau concludes. He says, “The last thing you want to find is that the highest bidder … is Attila the Hun Incorporated, and you really don't want to go with them.”Julie Ritzer Ross is a contributing writer for Health CXO.
Such was the message delivered to attendees of “Mergers and Acquisitions: Positioning Your Organization for the Post Reform Environment,” a three-part panel discussion held this past March at the 2012 Congress on Healthcare Leadership in Chicago, Illinois. “There are a lot of angles to look at in doing the deal,” says Alan Zuckerman, FACHE, FAAHC, president of Health Strategies & Solutions, Inc., Philadelphia, Pennsylvania, in kicking off the second portion of the discussion. “Emotions cannot be allowed to get in the way.”
Small rural hospitals, when executing M&A deals, must recognize that no matter what, management will be ceding some control in exchange for perpetuating the institution’s mission, asserts Dolan Dalpoas, FACHE, CEO of Abraham Lincoln Memorial Hospital, Lincoln, Illinois. Dalpoas deems it critical for executives of such hospitals to approach the negotiation process with their eyes wide open, inquiring which powers will be held by the parent health care provider company, and which will be retained by the acquired institution.
The structure of the hospital governance—specifically, whether representatives of the affiliate institution will be automatically appointed or elected to the parent organization’s board of directors and whether the CEO and members of his or her team will be retained by the new entity, and, if so, what roles they will fulfill relative to the parent company’s executives—merits examination as well.
“It’s like driving,” Dalpoas explains. “You need to understand the rules of the road before you get into the car and start moving.”
Communicate, Communicate, Communicate
Communications are not enough, Dalpoas emphasizes. Over-communication among rural hospital executive teams and constituents inside and beyond their walls also is essential as deal-making progresses, so as to diffuse anxieties within the hospital and among members of the community at large. “There will be a heightened sense of anxiety given strong hospital-community ties that can go as far back as 100 years,” he explains.
In 1994, Abraham Lincoln Memorial Hospital became part of the Memorial Health System, Springfield, Illinois, whose other two hospital affiliates encompass Memorial Medical Center, Springfield, an acute care facility affiliated with the Southern University School of Medicine, and Taylorville Memorial Hospital, also in Illinois, a critical access community hospital serving patients residing in and around Christian County.
While the deal with Memorial Health System was in the works, management struck up dialogues between community leaders, physicians, and hospital staff. Such dialogues focused on what the affiliation with Memorial Health System would and would not bring to the table, as well as how it would and would not affect Abraham Lincoln Memorial Hospital personnel. “We talked people through our vision of our future and what we were trying to accomplish, overlaying it with how the changes would jibe with our mission, vision, and cultural congruency,” Dalpoas explains.
Complex Governing Structures
Ann Madden Rice, FACHE, CEO of the University of California, Davis, concurs with Dalpoas about the importance of communication between concerned parties as M&A initiatives progress. She counsels hospitals that are teaming up with academic institutions to prepare to grapple with the complex governing structures of these entities. In almost all cases, she says, “it’s not just the university hospital, but the entire university you will encounter. So, be certain to ask questions as to who is making decisions, how appointments to the board of directors will be handled, etc. Most important, keep in mind that the people with whom one is working on a deal don’t necessarily have the final word on the arrangements.”
Rice says that like engaging in an M&A endeavor with a rural or community hospital, boarding the train with an academic institution such as hers presents unique challenges. For instance, most physicians who practice in an academic setting also have faculty appointments, and there are significant incentives regarding promotion and tenure. Expectations about training may be different than in non-academic institutions, calling for more rigorous programs.
“Although we focus on patient care, education, teaching, and community engagement are equally important and will continue to be so no matter what affiliations are formed,” she asserts.
In a somewhat different vein, Leo Brideau, FACHE, president and CEO of Ascension Health Care Network, St. Louis, Missouri, urges management at all hospitals beginning or in the midst of M&A activities to exercise due diligence as they proceed through the steps. Hiring a professional advisor to assist in all facets of putting together a deal tops the list.
“As a hospital executive, you’ll do maybe one, two, or three M&As in the course of your entire career; it’s not your core competency,” states Brideau, whose company, a joint venture between Ascension Health and Oak Hill Capital Partners (New York City, New York; Menlo Park, California; and Stamford, Connecticut), was formed to provide an alternate funding source for the acquisition of Catholic hospitals and other health care provider entities. “Any transaction will run more smoothly with a professional in place.”
Fair Market Value
Ensuring that fair market value is being obtained also should be a high priority, Brideau contends. He says so-called distressed hospitals are typically valued at 20 percent to 40 percent of net patient revenue. By contrast, healthy hospitals can sell for 80 percent to 90 percent of net patient revenue or, alternatively, be valued at six to seven times their adjusted earnings.
Bear in mind, Brideau observes, that immediate capital needs, funding for pension plans, and the retirement of existing debt generally consume the purchase price of distressed institutions. However, he states, healthy hospitals can frequently set aside cash for a community foundation that can be used for ongoing funding of local health care initiatives.
“Every deal is different, and the price ranges are current industry norms rather than Ascension’s figures,” the executive says, adding that it behooves hospital executives contemplating a sale to consider whether they want to offer their institution for sale on the open market or do some homework, then solicit bids from a smaller, preferred group of systems.
Limiting the pool of potential purchasers often turns out to be the best option, Brideau concludes. He says, “The last thing you want to find is that the highest bidder … is Attila the Hun Incorporated, and you really don't want to go with them.”Julie Ritzer Ross is a contributing writer for Health CXO.