Record year expected for healthcare M&A

2011 predicted to see 20 percent growth over 2010

NORWALK, CT – For the first three-quarters of 2011, the healthcare merger and acquisition market posted 707 deals with a combined worth of $185.9 billion. Experts predict total healthcare M&A activity for the year will surpass 2010 by 20 percent, according to a report from Irving Levin Associates.

“2011 is poised to surpass last year’s results by about 20 percent,” observed Sanford Steever, editor of Irving Levin Associate’s The Health Care M&A Report, in a press release accompanying the report. “While M&A activity may have slipped in other industries this year, just the opposite is true in healthcare.”

In the healthcare industry, the third quarter dollar volume contributed $58.9 billion, or 32 percent, to the $185.9 billion spent on merger, acquisition and takeover activity during the first nine months of 2011.
Based on results from the past 10 years, 2011 will be among the top five years for healthcare M&A, the report concluded.

The medical device industry continues to attract the majority of investor interest and dollars. For the first three quarters of 2011, medical devices account for $58.8 billion, or 32 percent, of all healthcare M&A dollars.

“Strategic buyers have strong balance sheets while financial buyers have equally healthy war chests, and with interest rates low, they both want to put these funds to work. While they once used this money to fund start-ups and basic R&D, recent concerns over a longer and more arduous regulatory approval process have made those uses of capital less attractive,” noted Steever. “They are instead focusing on growth by acquiring more mature companies with innovative technologies and established revenue streams.”

One reason for the uptick in M&A activity is that investors see certain areas like medical devices as smart investment opportunities. “Investors believe there is a good chance of ROI in this area. The older the population gets, the more medical devices they will need,” said Steever.

Another factor affecting M&As is the widespread trend toward hospital/physician alignment. “Hospitals and physicians practices are undertaking M&A for economies of scale, to create more efficient provider networks and to contain costs,” said Steever.

Tom O’Connor, managing director at New York City-based Berkery Noyes, says M&A activity is being driven in part by the regulatory environment, which has increased the need for technology-based solutions.

The healthcare industry has not kept pace with other industries over the past 15 years in making technology advances and is now scrambling to find ways to lower costs and improve workflows to comply with new healthcare legislation, according to O’Connor.

“The fastest way to grow is to acquire the best small business out there,” said O’Connor.

Other industries are also contributing to the growth in healthcare M&A. “Competition in the ‘software-as-a-solution’ space is also coming from competitors in concentric markets that are looking to move into the healthcare market,” said O’Connor. “Buying a software company is an easy way to move into the healthcare space.”

O’Connor also noted, “Volume is up, but price per deal is down because the real action is in smaller, privately-held companies.”

M&A legal expert George Taylor, III, partner at law firm Burr & Forman in Birmingham, Ala., believes the struggling economy is also driving the market.

“Oddly enough, (M&A activity) is not driven by prosperity, it’s driven by business failure,” said Taylor. “Either it’s companies that are selling off unprofitable assets, or they are going after entire companies that are not doing well and, therefore, represent a bargain.”

This growth trend for healthcare M&As is likely to continue for the foreseeable future.
“I think we will continue to see more hospitals and physicians groups affiliating in the next 18-24 months,” said Steever.

O’Connor agrees. “Competition for these small, rapidly-growing software companies will remain fierce in the next 18-24 months,” he said.


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