Healthcare Finance News Managing Editor René Letourneau spoke recently with George Taylor, III, partner at the law firm Burr & Forman in Birmingham, Ala., about the mergers and acquisitions environment in 2011:
What is driving the current M&A activity?
There are two basic buckets into which all acquisitions fall. One is strategic acquisition, which is done by people who want to use the businesses acquired for their own purposes.
The second is financial, where people are purchasing businesses to invest and hopefully sell in the future. They do not necessarily care what the business is. It is simply a financial investment.
For example a strategic investment would be a hospital purchasing another hospital. A financial investment would be an investment-banking group purchasing a hospital for investment purposes.
At the moment, it looks like most acquisition work in the country is strategic in nature. These could be vertical purchases where you purchase a supplier or customer, or these could be horizontal where you are engaged in an acquisition of a related product. Strategic acquisitions are really what is driving acquisition work right now.
There’s been some news lately saying that 2011 has been a banner year for M&A activity in the healthcare world. Why is that?
I wouldn’t say it’s been a banner year, but I would say there has been an uptick in activity in the healthcare field. Oddly enough, it’s driven not by prosperity but by business failures. 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.
What are the key factors involved in negotiating a merger or acquisition?
The key factor is always price. Second aspect is price. And, the third is price.
What do you expect the trends to be in the next 18-24 months?
I don’t really have an expectation as to trend. The overall economic conditions are so strange right now that it’s very hard to predict whether the volume will go up or down or sideways in terms of acquisitions. I do think most acquisitions will continue to be value driven. People are out there looking for bargains.
What do you find the most interesting about the current M&A environment?
The most interesting thing is the creativity that some of our clients are expressing in terms of entering fields that they haven’t been in before. We’ve also seen a lot of creativity in terms of financing healthcare acquisition transactions.
There are two elements involved with financing acquisitions. One, of course, is the equity piece, the purchase price of the asset. The other part is the debt piece.
Debt is an important element in the acquisition process, and it’s been difficult to find lenders willing to lend on healthcare acquisitions. It’s not true only in the healthcare field; it’s true throughout the acquisition world. So, we see many transactions come along that would be great transactions that can’t be done – not because there aren’t investors out there willing to invest, but because there is no source of loan, which is really fascinating. I never remember a time in our economic lives when that’s been the case.
Is this an impact of the poor economy?
Yes, it is the economy, but it also specifically relates to the health of our financial institutions right now and the increased regulatory pressures that are involved.
Are you finding any landmines as a result of healthcare reform?
Not yet. But, I think it relates to the ability of clever investors to snap up healthcare companies cheaply because the whole idea in the economy right now is that healthcare is not a good investment because there are regulations coming down that will make it harder to make money and that the whole environment for healthcare is poor. I think that is a shortsighted approach because healthcare is one of the few industries where demand is absolute. We are going to need healthcare no matter what. People must have it. So, I think that those investors who are afraid right now based on the regulatory environment will miss out on opportunities.