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2011 will be record year for mergers and acquisitions

It’s going to be a record-breaking year for mergers and acquisitions (M&A) in the healthcare industry, according to a recent report from Irving Levin Associates.

In its Health Care M&A Report, the Norwalk, Conn.-based company reported that the dollar volume committed to merger and acquisition activity in the healthcare industry during the second quarter of 2011 surged over the comparable figures in the first quarter (up 44 percent) and those of second quarter 2010 (up 61 percent).

Based on the numbers revealed to date, a total of $73.5 billion was spent to finance 243 mergers and acquisitions in the healthcare industry in the second quarter of this year. With regard to dollar volume, M&A activity is on track to break all previous records in this market.

The largest M&A sectors were medical devices with over $33 billion being spent (up 45 percent) and pharmaceuticals with over $27 billion being spent (up 37 percent).

There are a few reasons for the uptick in healthcare M&A activity, according to Sanford Steever, editor of the report. “The healthcare industry is fragmented in many sectors. Hospitals and physicians practices are undertaking M&A for economies of scale, to create more efficient provider networks and to contain costs,” said Steever.

Another reason is that investors see certain areas like medical devices as smart investment opportunities. “Investors believe there is a good chance of (return on investment) in this area. The older the population gets, the more medical devices they will need,” said Steever.

Among the services sectors, M&A activity remains robust in facility-based sectors, such as hospitals and long-term care, both of which led the sector in deal volume.

“Hospitals continue to digest the new healthcare reform law and to wrestle with its implications. One conclusion they have drawn is, come what may, there is strength in numbers,” noted Stephen M. Monroe, managing editor at Irving Levin Associates, Inc., in a statement.

“Accordingly, they are buying other hospitals and physician medical groups to build up local and regional systems, implement ACOs and share financial risk and reward through a more diversified provider network,” said Monroe. 

For the first half of 2011, the healthcare M&A market has posted 472 deals worth a combined total of nearly $125 billion. Annualizing these figures supports the prediction that 2011 will end with approximately 950 deals worth $250 billion, which would set a new record in dollars spent on M&A in the healthcare industry.

Will this M&A trend continue beyond 2011? Steever thinks so.

“I think we will continue to see more hospitals and physician groups affiliating in the next 18-24 months,” said Steever. “The big question mark is the debt ceiling debate – the markets are going nuts over the indecision and wrangling so far. If something untoward were to happen, it would pummel the stock market and that could have a ripple effect. It could have a negative impact on other markets.”

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