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Healthcare M&As poised to come off extended pause

High equity, strong liquidity and low-cost debt will fuel M&As in 2021.

Elective surgeries and routine doctor visits weren't the only areas to experience sharp declines at the onset of the COVID-19 pandemic. Healthcare mergers and acquisitions also hit historic lows with almost everyone putting plans on hold. Until now.

Publicly held companies and private equity sponsors are poised for significant healthcare-related M&A transactions in coming quarters due to high equity values, strong liquidity and low-cost debt. Those favorable financial factors mean well-capitalized healthcare buyers are positioned to extend their reach, and those weakened by falling revenues can be rescued.

"Because of the uncertainty related to COVID, healthcare providers became focused on liquidity and making sure they had sufficient cash to stay in business. The CARES Act helped tremendously in terms of the federal government providing funds to hospitals, health systems and providers through grants and advances from the Medicare program. Then the Federal Reserve suggested it will keep interest rates very low for the foreseeable future," explained Michael Mauldin, senior vice president and group head for Regions Securities' healthcare-specialized industry group, based in Birmingham, Alabama (HC Group is based in Nashville, Tennessee).

That optimism follows a dire economic period in which patient volumes dropped dramatically in Q1 and Q2 2020 due to quarantines and resource reallocation to COVID patients. Many of those same organizations saw their liquidity actually improve as they received CARES Act funding and built up cash reserves to weather the pandemic-related recession and take advantage of highly attractive interest rates. Additionally, publicly owned organizations saw their stock prices rebound, providing ample equity to fund expansions. And, private equity firms continue to hold capital they are now eager to leverage.

Regions Securities' advisers anticipate a lot of M&A activity around home healthcare and digital health technologies that offer remote care management and better clinical outcomes at a much lower cost – companies such as those providing durable medical equipment, diabetes care, in-home health and hospice, home infusion and specialty pharmaceuticals – all catering to consumers outside of a hospital environment.

Mauldin also sees healthcare organizations eyeing behavioral health services, given its importance in treating those traumatized by the pandemic's fallout. He also sees continued focus on those treating chronic conditions common among the elderly.

The key for any prospective buy or merge is to consider how and where an addition will add value – then engage in transactions that make the most strategic sense. And, of course, have a sound financial plan to fulfill that strategic vision. "It's not just a matter of 'Can we do it?' but 'How are we going to do it?'" Mauldin says.

He advises those being targeted to look at a potential purchase or merger as an opportunity to obtain more resources and treat more people. "There's a reason somebody is interested in your organization," Mauldin noted, "and it's probably because you've got a focus or niche they think is important."

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Disclosure: Regions Securities® is a registered service mark of Regions Bank and is used under license for the corporate and investment banking services of Regions Bank and its affiliates.

Regions Bank, member FDIC. This information is general in nature and is not intended to be legal, tax, or financial advice. Consult an appropriate professional concerning your specific situation.