As the healthcare industry continues to experience robust consolidation, health system leaders face mounting pressure to aggressively seize growth and scale opportunities that could help meet organizational strategic goals, such as enhancing a competitive profile, adding more clinical capabilities or creating a better value proposition for healthcare buyers. With opportunities including acquisition or divestiture of individual hospitals, health systems and physician practices, the mergers and acquisitions landscape has become increasingly complex. Additionally, shrinking margins and changing payment mechanisms put greater pressure on healthcare leaders to realize the expected value of a transaction through strategic, operational and financial alignment.
Deconstructing the conventional transaction framework
Most transactions require organizations to execute the following four steps to take the project from conceptualization to implementation (See Figure 1 for a visual representation).
- Deal thesis. “This phase begins prior to an organization exploring specific acquisition targets,” said Steven Sparks, a partner in Grant Thornton’s IT Integration practice. “It involves identifying the kind of asset you want to acquire and then developing affiliation objectives to guide potential transactions. As part of this process, you should define the returns your organization needs to see from a transaction, or deal thesis, and clarify and validate any foundational assumptions about the items that must be present and true to achieve your organization’s goals.” This step also involves forecasting to reveal any risks to an overall acquisition strategy or hurdles that should be addressed.
- Due diligence. Once an organization identifies a potential asset, it’s time for due diligence to both validate the deal thesis and identify any unknowns that may impact whether the transaction makes sense. “This step is all about verifying the asset’s current financial, technological and operational situation and assessing risks,” said Sparks. “As part of this phase, you must closely examine all aspects of the entity being acquired and make sure there are no red flags or areas that can either affect the purchase price or raise concerns after the deal has closed.” Organizations should review the asset’s financials and tax returns, operational procedures, regulatory compliance history, staffing and credentialing processes and technology systems. Getting a sense of the organization’s culture is also wise to make sure that any cultural differences between the two entities can be bridged.
- Integration/transition planning. After due diligence is complete and the transaction agreement nears signing, the task of preparing for taking control begins. Organizations should develop a framework that outlines the integration strategy and what is required to close the deal, laying the foundation for day one readiness. Areas to address in this step include defining interim operating processes, methods for ensuring business continuation and how to manage stakeholder expectations.
- Integration implementation. This phase begins after closing when the two entities start executing on the integration plan. “A lot of the work during this step involves monitoring pre-established metrics that demonstrate success and reviewing issues that emerge from the data,” said Stephen Thome, principal for Grant Thornton LLP Health Care Transaction Services.
“The key value drivers that made the deal thesis and financial projections work should become the key performance indicators to track transaction value as the deal becomes operational.”
Figure 1. The Transaction Lifecycle