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Healthcare M&A dips in Q3 2012 but is not cause for panic

The number of merger and acquisition transactions in the healthcare industry declined by nearly 10 percent in the third quarter of 2012 compared with the third quarter of 2011, according to a recent report from research and publishing firm Irving Levin Associates. Industry experts, however, do not think it indicates a major cause for alarm.

[Also: M&A: What is driving the market?]

The third quarter of 2012 saw the second straight quarterly decline in the number of publicly announced healthcare transactions. The dollar volume of healthcare mergers and acquisitions in the third quarter of 2012 dropped by 35 percent from the second quarter of 2012 and by 36 percent from the third quarter of 2011.

The decrease in merger and acquisition activity was mainly centered in the technology segment, with medical devices, pharmaceuticals and biotechnology all posting declines in transaction volume as well as dollar volume. E-health was the one technology sector that posted increases in number of M&A deals as well as dollars invested. The health services segment had almost the same number of transactions in the third quarter 2012 as in both the second quarter and the third quarter 2011. The dollar volume of health services transactions increased in the third quarter to $22.7 billion, up from an adjusted $19.2 billion in the second quarter (the adjustment was after a terminated $3.9 billion acquisition of a German hospital chain).

“Historically, the third quarter is usually the slowest quarter of the year, but with the continued economic turmoil in Europe combined with the uncertainty of the 2012 presidential election in the U.S., there has been more caution in the healthcare market,” Stephen M. Monroe, partner at Irving Levin Associates and editor of The Health Care M&A.

[Also: M&A: The present – and future – of healthcare]

The decrease in merger and acquisition activity was mainly centered in the technology segment, with medical devices, pharmaceuticals and biotechnology all posting declines in transaction volume as well as dollar volume. E-health was the one technology sector that posted increases in number of M&A deals as well as dollars invested. The health services segment had almost the same number of transactions in the third quarter 2012 as in both the second quarter and the third quarter 2011. 

Despite the declining figures, Monroe does not think the report warns of impending doom.

“I really think it was seasonal as well as cautionary,” said Monroe. “Already in October we are back on track with normal volume, with more than 80 announced deals so far (compared to 88 in October 2011). I believe consolidation will remain consistent with some possible post-election uptick as the players see what the terrain looks like.”

Sydney Scarborough, managing director of financial services firm Jones Lang LaSalle’s Healthcare Solutions group also does not think these M&A figures indicated a prolonged downward trend.

“Some of the key drivers of merger and acquisition activity, particularly among hospitals, healthcare systems and physician groups, are gaining greater market share, reducing costs, enhancing purchasing clout and achieving greater efficiencies,” said Scarborough. “We expect merger and acquisition activity to continue as long as there are health systems and physicians groups motivated by these drivers.”

“This will be particularly true for smaller groups and institutions. It’s becoming increasingly more challenging for a stand-alone hospital or a small physicians group to make the investments necessary to succeed without an affiliation, merger or acquisition,” she added.

Jon Krieger, managing director at New York City-based investment banking firm Berkery Noyes agrees.

“Yes, the number of transactions fell slightly, but valuation levels for privately-held middle market companies continue to increase and 2012 is on pace for a record year in terms of both the number of deals and valuation,” said Krieger.

“Healthcare IT is a non-partisan issue and regardless of who is elected to the White House, the $19 billion federal distribution to those providers that adopt enabling technologies has already begun and will continue to be distributed,” he noted.

[Also: Downward trend expected to continue for life sciences VC]

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