“The emerging driver for M&A today is about what intellectual capabilities and attributes can be brought to a market. That’s what’s driving today’s transactions.”
— Anu Singh
In this Q&A, Anu Singh, managing director with Kaufman, Hall & Associates LLC, shared his insights on the factors that health systems leaders should address to achieve success with a merger or acquisition.
Q: What are the top three considerations health system leaders should keep in mind when embarking on a merger and acquisition (M&A) opportunity?
Singh: One, it’s an expression of fiduciary responsibility. It’s about remembering where the organization is and what its leaders are there to accomplish — and understanding how those leaders can advance and improve upon the mission of an organization that has probably existed for, in many cases, a century or more. Leaders need to prepare their fiduciaries and stakeholders the right way, so they know what is happening with the organization, how dynamic the marketplace may be and how quickly change can happen.
Two is having a strong strategic rationale for why leaders should pursue or even consider a partnership opportunity.
Here are some examples. We have now seen transactions where the strategic premises are very clear. The senior executives or the CEOs of the organizations are saying, “We’re in one geography; they are in a different geography. We don’t have much overlap. There are things we can learn and pass to one another. We are leaders in telemedicine, and we have a strong integrated electronic health record platform. They don’t have either of those, but they have leading clinical programs in certain specialties. And so, we can cross-fertilize with one another. We have seen one instance where a health system said, “We have a health plan, and they have just started their journey to value. So bringing our health plan to their market is very complementary.”
When you lay out a strategic rationale, you might have a set of strategic objectives: “Here are the 12 things that our health system needs to accomplish. We can get seven of these done on our own, but we can get 11 done with a partner. And here’s why that’s better.”
The third consideration is just execution. What’s critical is to design a process and design a pursuit of partnership that matches your organization’s goals and objectives. Some organizations may have decided they want to focus on one specific opportunity and develop the business rationale for it, while others might say, “We’re open to all kinds of partners — one in the state, one outside the state, one of the neighboring health systems, one of the academic medical centers far away that doesn’t know us, but with which we’ve had some clinical affiliations. We want to have a broader process and we want to have more of a solicitation.”
So that third component is to make sure your organization’s goals and objectives and the strategic rationale you’re pursuing match the process that you’re going to undertake, because there’s no singular approach to finding that partner and being successful.
But there’s another point in all this that bears stressing: I think the challenges of this industry going forward are going to be dealing with less resources, but more benefit, meaning we have got to get better on value and efficiency. And we’re going to see increased segmentation of the market. So we’re going to see more disruptors coming in and saying, “I’m not necessarily interested in opening an inpatient hospital, but I’m very interested in being an urgent care provider or delivering your pharmaceutical medications to your mailbox. So with the industry moving in that direction, the partnerships have to move in that direction too.
So what’s the overall theme? Industry transformation is changing the basis of competition in our industry, and to thrive in that new base of competition, organizations must rethink their go-forward strategic plans.
Q: What about culture and fit? How should organizations looking to pursue a merger approach those issues, and when in the process?
Singh: I think culture and fit do not represent an independent due diligence category of assessment. It’s not the same as looking at things like facilities or environmental. It actually permeates everything you evaluate in the partnership solicitation and selection process. So when you begin the conversation and think about fiduciaries and stakeholders in your community, and you look at what they want for the organization or where they think it should grow and develop as a health system, you should look to the culture of other organizations and ask questions like, “How have they handled that process? What other things have they done? From what we can see in the marketplace, how have their partnerships actually supported a cultural approach that is similar to what we have?”
I think when it’s done right, the considerations that we talked about apply to culture in the same way.
If you read a mission statement for any not-for-profit health system, I can almost guarantee that anyone would say, “Yes, we agree with that.” But culture isn’t about agreeing with the vision statement. It’s about making decisions, empowering your stakeholders to make certain decisions and creating points of consensus or decentralization around decision-making to achieve that mission.
So when you get the cultural assessment going in that first phase, what you’re actually evaluating is how they make decisions and how involved their governance is in that process. And there’s not a right or wrong answer. What you’re looking for is enough compatibility to say, “We process things the same way.”
For example, within a specific facilitated discussion between two health systems, the idea of a board task force on both sides might resonate if the two organizations have done that before on strategic projects. Or what might be needed is to have the board chair sit with the other board chair and hammer things out, with involvement of the CEOs, and then to inform the board of the results before action is taken. Those are two different approaches, but if they’re consistent, it lays out a cultural element.
Then, there’s strategic rationale. When that second step is done right, we find the cultural assessment involves thinking about a common view of the go-forward business plan, and one of the critical components of strategic rationale is developing that plan. Even if it’s not perfect, even if it’s not detailed, you need to say what the two of you want to do together.
For example, you might think capitalizing on an orthopedic center of excellence, a neurological center of excellence and an oncology center of excellence between our two organizations is the best plan because those are the best three offerings we can bring to the marketplace within the whole region. So how would we do that?
You might say: “Well, we have an independent medical staff for neurology and so do you, so we’ve got to bring those teams together. And for oncology, everything is in-house, and we have a site of care that looks really good. We have a linear accelerator over here. We have proton therapy over here. Let’s put all this together and develop a business plan of how we would do it together. Do we co-brand? Yes, maybe we should. Do we need a new brand? I don’t know, but let’s think about that.”
That’s how you assess culture as you go through the strategic rationale. It has to be at that level of detail. So from my standpoint, culture is, is not just important. It’s critical! And it permeates every single aspect of the solicitation and the process of considering options.
Q: What kinds of pitfalls do you really want to avoid?
Singh: One of the things that needs to be guarded against is pursuing a transaction without being informed of why it’s so important. Sometimes, there’s a rush for deal-making and not enough thinking around the strategic rationale for it. And that can lead to suboptimal outcomes, because you’re comparing proposal to proposal on the basis of what others are saying rather than whether it’s what you wanted in the first place and how you can reconcile those perspectives to what you want. So I think it’s a pitfall to not set up the process and objectives in advance so you can clearly gauge success, benefits and execution risks, because if you are looking at it purely on the merits of the bids you receive, then you’re probably running a transaction process instead of seeking a strategic partnership.
Q: Can you give us a sense, from your experience, on how often organizations are more likely to find it doesn’t make sense to move ahead with a proposed merger, or they find they cannot do it? At what point are they most likely to know a proposal is almost surely a done deal?
Singh: I would say it’s before the public announcement where you see the greatest number of situations where it’s a polite handshake and the folks say, “We’re a great organization, and you’re also a great organization, but we’re going to remain independent great organizations.”
When it happens after a public announcement — say, in a due diligence phase or something else — I would say the reason for not moving forward is split between internal and external forces. And at that point, odds are that what came up wasn’t between the two organizations. Maybe you have a regulatory issue that comes up, where the regulatory agencies come in and say, “Yeah, not so fast.” But that’s an externally driven factor.
My point is that it’s not as if a lot of these mergers are being called off because someone said, “Oh my gosh, they don’t have proper elevator permits.” It’s not really inside of the organization. It’s something externally driven. Did COVID impact some of those situations? Absolutely. Is the market aware of all of them? Absolutely not.
When the pandemic took hold, some organizations did say, “We’ve got to take a pause on this and see how this thing plays out before we can come back and talk about re-engaging.” We’re seeing some of that re-engagement now. And that’s what I mean by the external/internal factors. But I think by the time you get to a letter of intent, an agreement in principle or a term sheet, or even to a definitive agreement, the deal has usually been agreed upon between the parties. If something’s not going to work, you’ve figured it out by then. Anything that happens afterward is more likely to be an external driver than something internal between the organizations.
For more from Singh, also see his comments in the April hfm magazine cover story where he discusses how healthcare mergers and acquisitions are picking up in 2021.