George Garrett and Eb LeMaster are evangelists for the gospel of Ardent Health Services. Garrett and LeMaster lead the investor-owned chain's development department. They are its dealmakers, but put aside any thoughts that their jobs are a series of power lunches, boardroom confrontations and clandestine meetings trading inside information in a mad rush to complete a deal.
The art of buying a not-for-profit hospital or system is a patient one that can take up to four years, says LeMaster, vice president of development for Ardent. "It's not an aggressive approach," he says.
Garrett, the company's managing director of development, uses this year's acquisition of Hillcrest HealthCare System in Tulsa, Okla., as an example. One of the first conversations that David Vandewater, Ardent's president and chief executive officer, had when he joined the company in August 2001 was with Hillcrest management, Garrett says. Ardent's $281.2 million acquisition of the 10-hospital system closed in August, three years after Vandewater's initial meeting with Hillcrest.
"We talk about how our missions can be complementary," Garrett says. "We talk about what Ardent is doing and let them come to the conclusion that it could be beneficial to their community."
Garrett and LeMaster seek out the executives and board members of not-for-profit hospitals and systems that fit Ardent's criteria relating to population size, growth and market share. That broader list is prioritized, then further culled by operating performance and whether the not-for-profit and Ardent would be a good fit on mission and culture.
Industry conferences, such as events held by the American Hospital Association and the National Association of Psychiatric Health Systems, are good places to spread the good word about Ardent, they say. Other contacts come from executives with whom Garrett, LeMaster and others in the development department have built a professional relationship over the years, such as in previous jobs. Some not-for-profit systems and hospitals simply start an auction that is a much quicker process for selling a hospital.
After the initial approach, persistence and confidentiality are the keys. "Confidentiality is sacrosanct even before there is a confidentiality agreement," Garrett says. He and LeMaster provide executives and board members of not-for-profit systems with news releases to keep them up to date on what Ardent is doing around the country and on the company's finances. They follow up with "continuing phone calls to build awareness among the board members and senior management," Garrett says.
Once a tie is developed with the acquisition target, LeMaster says, the management and the board will start to reveal what is important to their constituencies. That includes local business and political leaders, state regulators and labor. "They will tell you what the hot buttons are," he says.
If the contacts develop into a full-blown pursuit of a deal, it's a good idea to call a lawyer, says Paul Gilbert, a transactions lawyer with the Nashville firm Waller Lansden Dortch & Davis. The buyer and seller must both be wary of any conversations that could be considered issues of private inurement, such as whether local management would be retained in a deal, Gilbert says.
Not-for-profit sellers have a fiduciary duty to obtain fair value for their assets and to use a deliberative, proper process to reach all the major decisions in the process, such as whether to sell, for how much and to whom, Gilbert says. "The right decision, made correctly, should withstand attorney general review," he says. "It's a process that helps you make the right decision, but it also helps you withstand scrutiny."
The due diligence process is largely the same whether the acquisition target is a for-profit or a not-for-profit.
On the for-profit buyer's side, there is an interest in getting the attorney general involved in the process once buyer and seller have signed a letter of intent, especially if the company hasn't purchased a hospital in that state, Garrett says.
Besides the attorney general's approval or at least acquiescence in the deal, there are complicating factors that come up in a not-for-profit conversion deal that are absent in the sale of a for-profit hospital to a for-profit buyer, Gilbert says. A huge issue is what to do with the net proceeds of the sale, if there are any, and whether a new foundation will be set up or the 501(c)3 that ran the hospital will oversee the proceeds, he says.
Not-for-profit conversions also face the scrutiny of community and consumer advocates, Gilbert says, such as Consumers Union and Community Catalyst. "They can sometimes, even if you're the seller, be seen as a somewhat unwelcome third party," Gilbert says. "That's clearly something you don't have to deal with (in a for-profit to for-profit sale). They have access to newspapers and TV, they can send letters, and they can have the community do that, too. There are things that they can do to slow down a deal."
Once the deal is closed, Garrett and LeMaster still are often involved. In the Hillcrest deal, for instance, Ardent committed to invest $150 million in the first five years after the deal was completed, and some of that investment will go toward developing new ancillary facilities in Tulsa, so they are still working on the deal, in a sense.
* Confidentiality: Sealed lips are key.
* Persistence: It builds awareness of buyer.
* Sensitivity: Board has to live in town after sale.
* Contacts: Keep up with job changes, promotions.
* Compatibility: Missions must mesh to make deal.
Source: Modern Healthcare reporting