M&A: The present – and future – of healthcare

In what could be a developing trend, 233 mergers and acquisitions were announced in the healthcare industry during the second quarter of 2010, up 7 percent from the 218 deals announced during the prior quarter.

According to a new report from Irving Levin Associates, $46.3 billion was committed to fund this M&A activity, up 41 percent from the $32.8 billion spent during the previous quarter and up 62 percent from the $28.5 billion spent in the second quarter of 2009.

“If common wisdom holds and the second half of the year performs better than the first, then 2010 is on track to generate over 900 deals worth between $165 billion and $175 billion,” said Sanford Steever, editor of The Health Care M&A Report. “While not a record-breaker, 2010 could rank as the fifth most active year in the past decade for M&A.”
Steever said the increase in both deal and dollar volume over the previous quarter may be ascribed in part to the passage of healthcare reform in March, which has allowed companies to make better projections of their revenues and deal-makers to negotiate more realistic valuations for companies involved in mergers and acquisitions.

In particular, several service sectors that depend on government reimbursement saw deal volume increase over the first quarter’s levels.

“Hospitals have responded with a 186 percent increase, quarter over quarter, in merger and acquisition activity in the hopes of capturing their fair share of the 32 million previously uninsured patients,” Steever said.

Moody’s Investors Service, one of the “big three” national ratings firms, says M&A activity in the for-profit hospital sector has also increased in 2010 as hospitals have enjoyed more certainty over access to the capital markets as well as clarity about healthcare reform.

"We expect the U.S. healthcare reform to continue spurring M&A activity, since the new healthcare law stresses efficiencies, poses increased administrative burdens and will likely result in additional pressure on business with managed-care payers," said Dean Diaz, Moody's vice president and senior credit officer.

With a new regulatory landscape coming into focus, Steever said providers who rely on Medicare are better able to determine what their cash flow will be going forward.

“This will in turn help them decide whether to pack up their business and sell or to expand through acquisitions,” he said.

The report indicates that while service sectors are capturing an increasing share of the overall M&A market in healthcare, medical technology sectors such as pharmaceuticals and devices continue to see the greatest amount of dollar volume.

“The first six months of 2010 saw $16.6 billion spent on M&A activity in the healthcare service sectors, which already exceeds the $12.4 billion spent on the same sectors in all of 2009,” said Stephen M. Monroe, managing editor at Irving Levin Associates. “Strategic and financial buyers alike are finding attractive acquisition opportunities, particularly in the middle market for healthcare services.”

According to Monroe, the first half of 2010 registered 453 deals in the healthcare industry with a combined value of $79.1 billion.