Although healthcare transaction activity has slowed during the downturn in the economy, investment banks, private equity houses, hedge funds and lenders continue to aggressively seek healthcare deals.
According to recent research, there were 27 percent fewer healthcare mergers and acquisitions in the first quarter of 2008 as compared to the final three months of 2007. Against the backdrop of a tightening economy and credit markets, political uncertainty and healthcare regulatory changes are impacting investors, sellers and lenders.
Lenders are now requiring lower debt to equity ratios and are taking additional steps to minimize the risk of default, with particular attention to ensuring that due diligence is conducted thoroughly and competently.
Whereas the risk tolerances of healthcare lenders have been lowered, the healthcare industry does have the benefit of relatively better access to credit when compared to other areas of the economy. Thus, healthcare transactions can still be financed as long as they involve realistic cash flows and leverage ratios.
As private equity acquisitions recede, valuations of target companies are falling, bringing them into ranges that allow for strategic mergers. The relative shortage of well-financed buyers means that there is a real buying opportunity for investors with readily available financing.
The current healthcare acquisitions market may provide opportunities for many companies to emerge from the present downturn stronger than they were before it began if they focus on making sound strategic acquisitions.
In the past, many buyers understood their targets very well from a financial perspective, but not as well from an operational perspective. Leveraged buyouts of targets with significant upside potential left a considerable amount of room for growth. This lack of full operational understanding is no longer adequate, and due diligence efforts must now focus on ensuring that true strategic value is present.
Healthcare Special Purpose Acquisition Corporations, or SPACs, are companies formed for the purpose of acquiring a company using the proceeds derived from the SPAC’s initial public offering.
SPACs can be attractive to sellers because they allow the potential for the acquired company’s management to continue operating the business and benefit from the upside value that results from future growth.
The two primary factors influencing the healthcare marketplace, beyond tight credit markets, are regulatory changes announced by the Medicare program and the political changes in the wake of the recent national election.
Polls show that many voters favor some form of universal healthcare coverage. Such initiatives would likely affect investment in certain segments of the industry. However, investors should keep in mind that past political and regulatory changes have not caused radical shifts in the healthcare industry and that the current situation creates as many opportunities as risks.
When taking advantage of these opportunities, it is more important than ever for all participants in healthcare transactions to retain expert counsel and advisors with extensive knowledge of the market to conduct due diligence, thoroughly analyze the regulatory and reimbursement posture of the target, and to provide detailed guidance to understand and minimize risks.
William Spratt, a Florida Bar board-certified healthcare attorney, is a former healthcare administrator. He has significant experience in the areas of acquisitions, sales, mergers and reorganizations of healthcare businesses.