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M&A activity up in 2011

Experts predict record year for mergers and acquisitions

NORWALK, CT – 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 ROI 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 services 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.

“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.

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.”

Will this M&A trend continue beyond 2011? Steever and O’Connor both think so.

“I think we will continue to see more hospitals and physician 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.

For more on mergers and acquisitions, see bit.ly/hfn-capital.