Smaller M&A deals for 2013

Healthcare sector merger and acquisition (M&A) activity is expected to increase in 2013 compared to last year, but will likely be smaller-sized deals as health systems continue to consolidate and bulk up to prepare for health reform.
According to a survey of more than 50 healthcare executives by advisory services firm KPMG, 60 percent of respondents said they anticipated doing more deals this year than last.
The simpler financing terms that are associated with smaller deals compared to that of large transactions and megadeals will drive middle-market M&A activity for the remainder of the year, the executives reported in the survey.
However, 37 percent of respondents felt that it was collectively the simple financing terms, fewer risks and integration challenges, along with less complexity of due diligence needed for deals valued under $250 million that will spur activity dominated by middle-market deals.
Consolidation will continue for a number of years, according to Bill Baker, lead healthcare partner for KPMG's Transactions & Restructuring practice.
"It's just the nature of where healthcare is going, where you're having a convergence of payers and providers," he said. "You really need to have scale ... to handle the complexities of where the healthcare model is heading, where providers will be taking on financial risk for the care of the population."
A lot of M&A activity took place last year, as entrepreneurial-owned private healthcare companies that may have naturally waited until 2013 to sell did so sooner, especially at the end of 2012, "to capture the capital gains rates before they went up," Baker said. "You actually pulled forward a lot of the volume that would have probably occurred in the first half of 2013."
But he has seen volume in the middle market start to pick up over the last 60 days with early bidding and due diligence processes for transactions.
Additionally, the underlying fundamentals are improving, with a stabilizing economy, favorable credit terms, open debt markets and high corporate cash balances paving the way for increased healthcare M&A volume this year, he noted.
In a similar vein, Irving Levin Associates Inc., which publishes M&A data, reported that both the number and value of healthcare mergers and acquisitions plummeted in the first quarter of 2013 compared both with the previous quarter and the year-ago period.
The drop in M&A activity was described by Stephen Monroe, partner at Irving Levin, during a webcast as "fairly broad" across the health services sector. However, he also said that he anticipates that M&A activity will pick up as the year progresses, but "... more of the acquisitions will be strategic and smaller than in past years."
"With capital costs so low and both equity and debt available in large amounts, we also expect private equity groups to pounce once again," Monroe said.
Fourth-quarter deal volume tends to be higher because there is typically a push to get deals done before the yearend, Monroe said.
"Our guess is that there was a bit of burnout from end-of-year activity combined with the sequestration problems, and the continuing logjam in Washington regarding budget deficits and entitlement reform," Monroe said.
In pharmaceuticals, M&A activity is also likely to pick up in 2013, according to Moody's Investor Service, in its recent report, "Global Pharmaceutical Industry: Return to Earnings Growth in 2013 Keep Outlook Stable."
Some companies, such as Roche Holding AG, Pfizer and Novartis, have reduced enough debt following large transactions and could resume shopping for acquisitions, as they have built up large cash balances. Such acquisitions are expected generally to be small- to mid-sized, the report said.
In the revenue cycle management/accounts receivable management sector (RCM/ARM), transaction value and volume in the first quarter of 2013 was ahead of the year-ago first quarter but was dwarfed by the end-of-year quarter in 2012, according to Greenberg Advisors. In 2012, 35 percent of the transactions that the firm tracked involved sellers focused in healthcare, with RCM companies representing over 20 percent of sellers.