Watch out for falling prices. Recently, a number of buyers have marked down their offers to acquire hospitals by millions of dollars to reflect changing market conditions.
Experts say the cuts in purchase offers signal concerns about future cash flow of acquisition targets. It is unclear, in some cases, whether hospitals facing increased managed-care discounting, tightening government reimbursements and losses on bad physician and HMO investments can sustain their financial momentum.
Those same financial pressures have sparked a wave of hospital downsizings, bankruptcies and restructurings from coast to coast (Dec. 14, 1998, p. 2; Dec. 21-28, 1998, p. 2).
Some recent markdowns:
*St. Mary's Medical Center in Evansville, Ind., slashed its offer for rival Welborn Baptist Hospital by $16.1 million.
*Alexian Brothers Health System, Elk Grove Village, Ill., dropped its offer to Columbia/HCA Healthcare Corp. for two of the Nashville-based chain's Hoffman Estates, Ill.-based hospitals by $11 million to $270 million, according to state regulators.
*Another would-be buyer of a Columbia hospital, Adventist Health System of Winter Park, Fla., recently told the Illinois Health Facilities Planning Board that it was considering knocking as much as $10 million off its proposed offer of $155 million for 175-bed LaGrange (Ill.) Memorial Hospital.
Much can happen between the time a letter-of-intent is signed and a deal is closed, said David Felsenthal, a managing director with Valuation Counselors in Chicago. Prices, he said, are very bottom-line driven. "By the time you come down to (closing the deal), the numbers are different, so the price drops," he said.
St. Mary's, for example, tendered its initial $67.6 million offer to acquire 296-bed Welborn Baptist nearly 11 months ago based on 6- to 8-month-old information, explained Wilma Newton, executive vice president of corporate development and chief financial officer at 380-bed St. Mary's.
The hospital lowered its offer to $51.5 million to reflect a number of factors. Those included Medicare reimbursement changes made by the federal Balanced Budget Act, the loss of state Medicaid disproportionate-share funds and price concessions negotiated by a major payer, she said.
Buyers often adjust their prices based on information unearthed during due diligence, finance experts said. If you're paying, say, a multiple of 10 times cash flow, and you find $1 million worth of lost revenues, that causes a $10 million adjustment in the purchase price, said Gary Bunton, a managing director with Shattuck Hammond Partners, the healthcare investment banking and financial advisory arm of PriceWaterhouseCoopers.
What's different now is that many buyers have more reason to be skittish about hospitals' future performance.
"They're discounting the initial expectations of being able to generate revenue from those institutions," observed Sanford Barth, a partner and director at Century Health Care Solutions Group, a Jenkintown, Pa.-based consulting firm.
Future value also can be compromised by seemingly endless paper trails, court proceedings and state regulatory scrutiny. As time passes, uncertainty at the target hospital mounts, physicians flee, morale plummets and value tumbles accordingly.
That, in part, explains why Tenet Healthcare Corp. backed off its original $465 million bid for Allegheny Health, Education and Research Foundation's bankrupt Philadelphia operations. In the months before the deal closed last November, scores of physicians fled and admissions plummeted.
While Santa Barbara, Calif.-based Tenet took into account AHERF's acknowledgment that its audited figures were unreliable, the for-profit chain said the main reason it slashed its offer to $345 million was to reflect a "serious erosion" of the business, said Tenet spokesman Harry Anderson.
"We were buying the forward-going business," he said.