Merger and acquisition activity in the healthcare industry’s service sectors improved in 2010 as the impact of the credit crunch and recession began to fade, according to Irving Levin Associates’ "The Health Care Services Acquisition Report."
According to the Norwalk, Conn.-based analyst, 458 merger and acquisition deals were announced in nine sectors of the healthcare services industry, up 24 percent from the 368 announced in 2009. Moreover, the dollar volume spent on M&A activity soared 425 percent, from $12.3 billion in 2009 to $64.9 billion in 2010.
[See related story: M&A - the present and future of healthcare]
“While the middle market continued to thrive in 2010, we saw a return of the mega-deal with 18 separate billion-dollar transactions announced during the year as compared with just one in 2009. The passage of significant healthcare reform in March 2010, just one year after the generational market bottom, helped to accelerate the recovery in the markets,” said Sandy Steever, the report's editor.
The hospital acquisition market showed marked progress in 2010 with 73 transactions announced, involving 175 hospitals with 29,294 beds, for a combined price of $12.8 billion (this includes Community Health Systems' $7.3 billion hostile bid for Tenet Healthcare). Taking the Community-Tenet deal out of the equation, 2010 posted a 38 percent increase in the number of hospital deals, a 59 percent increase in the number of hospitals acquired and a 212 percent increase in dollars spent on hospital transactions.
However, certain indicators of hospital pricing fell in 2010. For example, the average price-to-revenue multiple was just 0.66, as compared with 0.78 the previous year. This decrease reflects a higher level of bankruptcy and distressed sales in 2010 with nine such sales, as compared with just one in 2009.
“With capital beginning to return to the market, buyers now have the means to take advantage of acquisition opportunities represented by financially distressed sellers. As this market evolves, acquisition pricing will continue to seek its ‘new normal,'” said Stephen M. Monroe, a partner at Irving Levin Associates.
According to the report, physician medical group merger and acquisition activity rose to its highest level in five years. In 2010, this sector posted 63 deals involving 2,370 physicians for a combined total of $425.4 million. Merger and acquisition deal volume thus increased 54 percent year-over yea,r while dollar volume rose 330 percent.
“As hospitals and integrated delivery systems attempt to create accountable care organizations, they are building the physician component of these organizations through acquisition,” Steever said. “Further, hospital-based physician practices stand to prosper more than freestanding practices in the emerging reimbursement environment, prompting physicians to join forces with acute care providers.”