Three Steps for a Financially Successful M&A Deal

November 30, 2012

According to a recent study, the majority of hospital and health system merger and acquisition transactions are not financially successful. Booz & Company, a global management and strategy consulting firm, analyzed a sample of 220 hospitals with pre- and post-transaction performance data over a 10-year period (1998-2008) and found that less than half (41 percent) of all acquired hospitals outperformed their market.

The target with M&A deals is to accomplish a strategic goal as well as obtain a financially stronger position post-transaction. Below are three steps that may help a hospital or health system develop a deal with positive financial margins:

  1. Identify Ultimate Goal. To help ensure success of a transaction, identify clear organized goals and how a particular transaction will help execute those goals. Ideally goals should be identified before a deal is contemplated and mergers and acquisitions should fill a need in the strategic vision to achieve the goal. Outlining goals before a deal is on the horizon will serve as a frame of reference for potential deals and ensure that the transaction is entered into for the right reasons, overall producing more value post-transaction.
  2. Conduct Extensive Due Diligence to Identify Unity Between Providers. If there is a strategic rationale for a particular transaction, then extensive due diligence must be performed in order to understand the true picture of what the two hospitals or health systems working together will produce. Both positive and negative implications of the deal should be identified and analyzed. Additionally, it is important for hospitals and health systems to merge with other hospitals or health systems that have like-minded views about the future and culture, as well as similar views around their positioning in the market. Factors that make one hospital or health system successful are not always the same things that make another successful. Failure to align with like-minded providers may make it difficult to realize value from the transaction.
  3. Create and Implement an Integration Plan. Once goals are identified and due diligence is performed to ensure a particular transaction will help to realize the goal, hospitals and health systems need to plan an integration strategy that helps to capture the positive aspects of the merger or acquisition. For the best results, integration plans should be developed as soon as a provider is comfortable a transaction will occur. This will allow the plan to be executed the day after closing. Many integration details need to be addressed, such as culture, medical staff, support needs, board structure roles and responsibilities and change of management; and the quicker a plan is in place and implemented, the quicker the two parties can begin working together.

Overall, post-transaction financial success is possible if an M&A transaction is a step toward an already established goal, is followed by due diligence and is implemented in accordance with an integration plan. For more information about steps to take for financially successful transactions please contact one of the authors.