When selling a hospital, the following factors may either woo or worry potential buyers. Rex Burgdorfer, an M&A banker with Juniper Advisory in Chicago, shares four points to examine before putting your hospital on the market.
1. Quality of the market and the hospital's market share. Simply put, buyers are paying for the opportunity they see in the market. Buyers will consider the potential changes in a market's demographic, such as an increase of Medicaid patients as baby-boomers retire.
If consolidators see opportunities to improve a hospital's market share through relatively small investments, they will be much more inclined to pursue the acquisition further. Small investments or improvements could include the recruitment of specialists to capture lost business when people visit other hospitals in the market (outmigration).
"Buyers may look at a hospital . If they see demand for a service not presently offered, for example an orthopedic group, it dramatically changes their level of interest. A system could acquire the facility and through relatively small investments, recruit specialists and alter the service mix to meet market demand," says Mr. Burgdorfer.
2. Circumstance of the buyers. It is particularly important to understand the circumstances of potential buyers when entering into a change of control transaction. A couple of years ago, Juniper was advising on a hospital transaction with unique conditions. "We had two companies emerge as logical buyers," says Mr. Burgdorfer. "When we were going about our analysis, one potential suitor purchased the other." The two leading candidates suddenly turned into zero, since one no longer existed and the other took on a considerable amount of debt.
Examples such as this speak to the importance of "evaluating all alternatives simultaneously," according to Mr. Burgdorfer. Alternatives can take form in a variety of transaction models — such as affiliating, leasing, selling, merging, etc. — and within each model are multiple suitors. "If the suitor's situation deteriorates for some reason, you have options to go another route. Assessing options simultaneously yields vastly better transaction outcomes," says Mr. Burgdorfer.
3. Regional and national trends. If a hospital is considering going to market either now or 16 months from now, many think now is better, says Mr. Burgdorfer. Since healthcare reform has spurred significant consolidation activity, hospitals approaching the market now will capitalize on the widespread belief that more business combinations are to be expected.
Healthcare reform will greatly impact hospital consolidation by decreasing revenues, increasing costs and rewarding integration. Hospital M&A activity volume for the third quarter of 2010 increased by 20 percent compared to the same quarter in 2009, according to Irving Levin Associates.
"There's a new group of buyers that did not exist prior to healthcare reform," says Mr. Burgdorfer. "By assessing options now, hospitals are taking advantage of the capital that group of buyers is willing to expend." If hospitals wait, that capital could be put toward other projects, he says, although the fluidity of the market makes it difficult to determine when that may occur.
4. Importance of external, macro factors. Many consultants advise clients to focus on small improvements to boost short term profitability, like cleaning up receivables or collecting accounts payable in a more timely fashion. These minor improvements, however, do not typically sway buyers, according to Mr. Burgdorfer.
"If a hospital is deciding when to sell, it's more important for them to look at the external macro trends and the circumstances of potential partners rather than focusing on internal metrics," says Mr. Burgdorfer.
Learn more about Juniper Advisory.
Read more about hospital M&A activity:
- Considerations for Acquiring or Affiliating with Another Hospital
- 21 Recent Hospital and Health System Transactions
- The Impact of Healthcare Reform on Hospital Consolidation
1. Quality of the market and the hospital's market share. Simply put, buyers are paying for the opportunity they see in the market. Buyers will consider the potential changes in a market's demographic, such as an increase of Medicaid patients as baby-boomers retire.
If consolidators see opportunities to improve a hospital's market share through relatively small investments, they will be much more inclined to pursue the acquisition further. Small investments or improvements could include the recruitment of specialists to capture lost business when people visit other hospitals in the market (outmigration).
"Buyers may look at a hospital . If they see demand for a service not presently offered, for example an orthopedic group, it dramatically changes their level of interest. A system could acquire the facility and through relatively small investments, recruit specialists and alter the service mix to meet market demand," says Mr. Burgdorfer.
2. Circumstance of the buyers. It is particularly important to understand the circumstances of potential buyers when entering into a change of control transaction. A couple of years ago, Juniper was advising on a hospital transaction with unique conditions. "We had two companies emerge as logical buyers," says Mr. Burgdorfer. "When we were going about our analysis, one potential suitor purchased the other." The two leading candidates suddenly turned into zero, since one no longer existed and the other took on a considerable amount of debt.
Examples such as this speak to the importance of "evaluating all alternatives simultaneously," according to Mr. Burgdorfer. Alternatives can take form in a variety of transaction models — such as affiliating, leasing, selling, merging, etc. — and within each model are multiple suitors. "If the suitor's situation deteriorates for some reason, you have options to go another route. Assessing options simultaneously yields vastly better transaction outcomes," says Mr. Burgdorfer.
3. Regional and national trends. If a hospital is considering going to market either now or 16 months from now, many think now is better, says Mr. Burgdorfer. Since healthcare reform has spurred significant consolidation activity, hospitals approaching the market now will capitalize on the widespread belief that more business combinations are to be expected.
Healthcare reform will greatly impact hospital consolidation by decreasing revenues, increasing costs and rewarding integration. Hospital M&A activity volume for the third quarter of 2010 increased by 20 percent compared to the same quarter in 2009, according to Irving Levin Associates.
"There's a new group of buyers that did not exist prior to healthcare reform," says Mr. Burgdorfer. "By assessing options now, hospitals are taking advantage of the capital that group of buyers is willing to expend." If hospitals wait, that capital could be put toward other projects, he says, although the fluidity of the market makes it difficult to determine when that may occur.
4. Importance of external, macro factors. Many consultants advise clients to focus on small improvements to boost short term profitability, like cleaning up receivables or collecting accounts payable in a more timely fashion. These minor improvements, however, do not typically sway buyers, according to Mr. Burgdorfer.
"If a hospital is deciding when to sell, it's more important for them to look at the external macro trends and the circumstances of potential partners rather than focusing on internal metrics," says Mr. Burgdorfer.
Learn more about Juniper Advisory.
Read more about hospital M&A activity:
- Considerations for Acquiring or Affiliating with Another Hospital
- 21 Recent Hospital and Health System Transactions
- The Impact of Healthcare Reform on Hospital Consolidation