The wheels of business never stop turning, especially when it comes to companies merging and acquiring others. And in that world, there are always peaks and valleys, and the healthcare industry is no exception. Although the worldwide COVID-19 pandemic has slowed M&A activity overall, which includes the healthcare industry, there is still activity in that sector. Now in the post-pandemic era, there is a greater overall emphasis on the healthcare business, and this movement looks as though it will only continue to grow.
The Healthcare Sector
Understand that the healthcare industry is a big business, made up of all the companies that offer health-related services, pharmaceutical and life sciences businesses, medical equipment manufacturers and ancillary industries that are health-related, such as medical insurance companies. In short, it’s composed of the largest pharmaceutical companies that produce blockbuster drugs all the way down to the walk-in clinic in your town, and everything in between. There is always overlap and gaps when it comes to this industry, and there are constantly mergers and acquisitions that strive to solve those issues while looking to grow profits.
Simply put, mergers and acquisitions (M&As) are legal and financial transactions. Just as the name states, it’s when two companies merge, or when one company acquires the other. And like other types of business transactions, there are many different types and flavors of M&As, including acquisitions of assets, tender offers, and management acquisitions, each of which has its own nuances. There are multiple reasons why companies would partake in a merger or acquisition, including increasing market share, reducing competition, gaining instant traction in a new market, or acquiring new IP (intellectual property), but the endgame is always to grow value.
Healthcare M&As: What They Are
M&As in the healthcare sector have been a busy area for most of the 21st century, and that trend doesn’t look to change anytime soon. A 2021 Bank of America report is bullish on the future of healthcare M&A activity, with 71% of respondents anticipating an increase in healthcare M&A activity in the next three years. And because revenue growth accounts for 50% of total shareholder return in public healthcare companies, there is impetus for these companies to not only remain profitable, but to continue to grow.
Healthcare M&As: How They Differ from Other M&As
While virtually all M&As share many similar attributes, there are some factors that differentiate healthcare M&As from M&As in other sectors. What makes the healthcare industry M&As different from other large business M&As is the industry itself; there is not only profit (and other business benefits) involved, but patients, real people.
As virtually every human has some connection to the healthcare industry, that means that there are differences such as the heightened need for security to protect the privacy of not only the companies (many of which deal with valuable proprietary information), but the confidentiality of the patients involved. However, in the big picture, the list of assets and the pros and cons of any healthcare M&A deal is roughly equivalent to M&As in other sectors.
Healthcare M&A Processes
In order to complete a successful M&A in the healthcare industry, there are several steps that need to be taken. These include the following.
- Initial analysis: If you’re buying, this is a complete analysis of the target company, its assets and operations. If you’re the seller, then the same report is generated for your company.
- Letter of intent (LOI): A letter of intent is a non-binding document, which states the preliminary commitment that one company plans to perform a business transaction with a second company. It states the major terms of a prospective business deal and is typically drafted in “letter” format.
- Confidentiality agreements: In all instances, since companies in the healthcare field are always brimming with private information (some of which may fall under HIPAA regulations), confidentiality agreements must be signed by all parties.
- Negotiation: Here, the terms of the deal are committed to the contract. Not everything here is written in stone; here is where the basic building blocks of the transaction are spelled out. A number of items, such as findings uncovered during the due diligence phase (see below) can alter the terms that will be on the final agreement.
- Due diligence: Due diligence is the process by which the parties of a pending deal evaluate both the assets and liabilities of a company. Not only is the current situation analyzed, but also issues that might affect future performance. The objective is to accurately gauge the value of a company, based on all the items that can be examined.
- Final agreements: The final agreement (or purchase agreement) is the legally binding contract. It incorporates the agreed-upon elements listed in the LOI, along with other terms and conditions of the transaction.
A Mandatory Step
A virtual data room (VDR) is a vital tool for any healthcare organization involved in an M&A. A VDR is a secure, online document storage location that offers the security to allow companies in all phases of a merger or acquisition to communicate. A VDR allows parties to store and share the required documentation for an M&A safely and securely. A VDR provides cost savings and speed to any transaction by allowing all parties to share and edit documents quickly and securely. It delivers a secure, online vault for storing and sharing documents, and its controls provide access privileges for the legal, financial and other parties involved in the transaction.
The CapLinked Solution
CapLinked, an industry leader in the VDR space, delivers secure VDRs for any healthcare company involved in an M&A. CapLinked’s VDRs provide secure access, enterprise-level encryption, multiple layers of security and version control. Its user-friendly interface allows easy uploading and editing of documents and is compatible with virtually every operating system. See how CapLinked can help streamline your healthcare M&A with a free trial.
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.
Bain & Company – Healthcare M&A: A Pandemic-Induced Slowdown in Every Sector