Health Care Transaction Activity
The total value of health care industry mergers and acquisition transactions within the mid-market as reported by Capital IQ in 2010’s 4th quarter was not as robust as the 3rd quarter, which is surprising based on our expectations. However, in what is normally a period that sees a fall off from the traditional yearend pickup, transaction activity in 2011‘s 1st quarter continued at a strong pace. In fact, the aggregate dollar value of transactions below $1B within the past two quarters ($26BB) nearly equaled the value for similar transactions in all of 2009 ($29BB). Transaction activity in the small mid-market sector reveals even more impressive interest in the health care market. Capital IQ reported the total dollar value of transactions valued under $500MM in January alone exceeded the value of comparable transactions during the entire 1st quarter of 2009. However, most transactions in that smaller sector involve privately-held businesses so the dollar value is generally not publicly available. Therefore, an important indicator of interest in the small end of the mid-market is the number, or volume, of transactions where the dollar value is undisclosed. As the chart below indicates, the past two quarters have seen significant increases in these undisclosed value transactions.
Source: Capital IQ
If transaction volume of activity and total dollar value of reported deals is not a strong enough indicator of interest in health care, consider the multipliers applied to these deals. A good opening point for many recent transactions for companies not involving specialized or patented health care technology have been seen starting in the 6x to 9x EBITDA range instead of historical 4x to 7x. In some cases were the seller has significant market share and in cases where proprietary technology comes in to play multiples far exceed these ranges. Enthusiasm is only expected to grow, as companies and investors react to healthcare reforms that are reshaping this industry.
Hospital M&A Momentum
The Health Care Hospital sub-sector continues to grab significant M & A headlines. As reported by Health Care M & A Monthly, hospital M & A activity finished the 4th quarter of 2010 with 23 announced or closed deals ($7.8BB in value). This compares to only four deals in the final quarter of 2009. Hospital M &A is being driven primarily by consolidation to take advantage of enhanced access to credit and the need for scale when negotiating reimbursement rates and purchasing contracts. Last year ended with a reported a total of $17.4BB in transaction activity. The consolidation trend continued in the first two months of 2011 as 12 new hospital deals were announced. As industry peers noted during a session filled primarily with members from the private equity and investment banking community during ACG’s recent annual InterGrowth conference in San Diego, three factors will differentiate the winners from the losers in the years ahead. Reform will favor the following:
- Those with access to capital
- Companies of scale
- Those that can provide a certain quality of service
Owners or shareholders of health care businesses who are considering near term sale, merger or recapitalization, should certainly consider beginning the process now. Interest and activity in all sub-sectors has been lively and, for many, this may be an advantageous time to consider liquidity or a recap. The health care industry is not without its challenges, Specifically, the stressed budgets of both state and federal governments make it more difficult for buyers to predict reimbursement rate risks or future revenue. While many companies do not have direct exposure to this issue, all will feel the effects. Therefore, any health care industry business considering an ownership restructure might be prudent to move sooner rather than later.
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