Compared to 2014 and 2015, 2016 healthcare M&A activity had a lot to live up to. The previous two years were record setting years for healthcare M&A activity in terms of volume and values. The negativity surrounding the election season could have had something to do with it, but more than likely it was just the natural ebb and flow of the healthcare M&A activity cycle. The fundamentals of the market remain sound–low interest rates, most providers need to scale to offset falling reimbursement rates and value base care is driving alignment.
What has been most notable in 2016 has been the activity of private equity groups (PEGS) in healthcare. Since the passage of the ACA, we’ve seen more PEGs exit healthcare investments than enter, but 2016 changed all that. Part of this is vintage of the funds, but most of it just the low risk tolerance of the reimbursement environment. This is why you see PEGs move toward the more simplistic businesses like dental services organizations, dermatology practices and even veterinarian practices that are mostly driven by private insurances or more likely private pay. The challenge for these groups; however, is capital follows capital and they end up chasing the same deals.
A little M&A 101–There are usually more strategics competing over deals than PEGS, which explains the higher number of strategic transactions. Also, all things being equal, strategics generally pay a higher valuations than PEGs. There are exceptions to the rule, but strategics can typically get better leverage or synergies out of an acquisition and are sometimes willing to pay a little more.
Looking into 2017, healthcare M&A activity will likely pick back up, but it will be touch and go. If the ACA repeal/replacement gets heated, it could send buyers to the sidelines. However, the consensus seems to be that reimbursements are still going to get cut either way so scale is going to matter, which means acquisitions will matter. The more interesting question will be how or if value based care will be implemented. Commercial insurers are committed–will the new administration remain committed?
About Wyatt Matas: Wyatt Matas is a healthcare investment banking firm focused on assisting clients in acquiring and selling healthcare businesses. For more information or to subscribe to our articles and white papers, enter your name and email below.