Despite tightening credit markets, at least one regional brokerage and investment banking firm sees continued activity in healthcare transactions in 2008.
While there may be few, if any, blockbuster transactions in the healthcare industry, there's likely to be continued consolidation, predicted Michael Hammond, managing director at Shattuck Hammond.
The New York-based firm, a division of Morgan Keegan & Company, Inc., announced or completed 12 healthcare merger and acquistion transactions during the past 12 months, with a combined value of $2.1 billion.
"We continue to experience strong merger and acquisition activity in the healthcare service sector, particularly for 'non-mega' transactions," Hammond said. "From what we're seeing so far, the turmoil in the debt market has generally not materially impacted transactions under $500 million."
The firm remains cautiously optimistic that merger and acquisition activity will continue at similar levels as those experienced last year, Hammond said.
"It's still a quite fragmented business segment," he said. While there has been consolidation among pharmaceutical, hospital and managed care companies, some of the ancillary organizations that serve these segments are still small and fragmented.
It's these ancillaries, such as home care, lab companies and hospice providers, that are likely to experience growing consolidation, Hammond predicts.
He also expects there will be less reliance on debt financing, in part because lenders will be requiring stricter requirements from borrowers and won't extend as much debt leverage as in the past.
"Growth capital is being required, and most of it's coming from private equity sponsors," Hammond said. "You're not seeing the leveraged buyouts with hostile management companies, like you did in the past. Debt was very inexpensive, and equity was depressed. Those types of transactions have disappeared."
According to the company, contributing factors to the continuing strength of mergers and acquisitions include strong interest in acquiring healthcare payers and providers among both strategic and financial buyers, available credit for small and mid-size deals, continued growth in healthcare spending nationally, the growing aged population and a continued trend of private equity as a growing force in financing transactions.
However, investors and M&A activity also could be muted because of uncertainty surrounding the presidential election and what pressures the healthcare industry could face resulting from reform initiatives of the new president, Hammond said.