The number of health services transactions were down in the first half of 2020, but merger and acquisition experts expect deal volumes and value to rebound in the second half of the year.
Deals involving health services organizations were more than 21% lower through the first half of 2020 compared to that period the prior year, while deal value dropped 52%, according to a new report from PricewaterhouseCoopers, which includes hospital, clinics, post-acute care organizations and other providers in that category along with labs, imaging, pharmacy, staffing and research services.
While COVID-19 has slowed the approval times for deals already in the works, M&A experts expect more of those transactions to come through in the second half of the year. Organizations in a position to buy, such as integrated health systems, managed care companies and private-equity firms, are poised to pick up non-core assets of companies looking to downsize, said Nick Donkar, health services deals leader at PricewaterhouseCoopers.
"There is a robust amount of private equity capital and those in the provider space that have lines of credit to be acquirers and the capacity to handle turnarounds will have opportunities to acquire divestitures in the latter half of the year," he said. "The real question is regarding the continuance of COVID-related impacts on transactions—we're seeing deal processing taking a little longer with increased regulatory scrutiny and additional approval requirements."
COVID-19 has derailed some hospital merger and acquisition talks, or at least delayed them as hospitals manage high-acuity patients, lower revenues and higher costs. Beaumont Health planned to acquire Summa Health, but called off that deal in late May. Beaumont then turned to Advocate Aurora Health, which it said began partnership talks in late 2019 but paused during COVID-19.
"Across all sectors of healthcare, the stay-at-home order has negatively impacted and deferred multiple transactions," said John Langenderfer, managing director of healthcare banking at Huntington Commercial Bank, noting that talks are ongoing as organizations navigate the pandemic. "Huntington believes that not-for-profit (health systems) will continue to affiliate and merge, creating substantial, investment-grade organizations with deep resources."
While COVID-19 has slowed mergers and acquisitions in the works, it has also reshaped strategic goals. Private-equity firm TPG Capital's $1.2 billion acquisition of LifeStance Health, a behavioral health company, may indicate that areas like behavioral health and virtual care will draw more interest, PwC researchers said.
"Healthcare organizations are focused on what the new norm of volume looks like, especially with the advent of telehealth," Donkar said.
Regulators will be weighing potential anticompetitive effects of mergers and acquisitions against any loss of care access if providers otherwise face closure, he added, noting that deals involving CARES Act fund recipients will need to be crafted carefully.
Through the first half of 2020, long-term care—a common private equity target—other services (medical office buildings, outpatient facilities, pharmacy-related services, physician staffing services and contract research organizations) and physician groups were among the most active sub-sectors, according to the PwC report. Home health and hospice continued to garner high valuations, which COVID-19 will likely buoy, the report found.
Mergers and acquisitions can be a resilience strategy: a way to add strategic assets or relationships that preserve growth, profitability or performance; and/or a way to free up capital by shedding non-core assets, PwC researchers said.
"We are pretty positive that deal volumes will rebound," Donkar said. Healthcare sector deal volume has been robust for the past 16 to 18 quarters, he added.
Joint ventures, among other informal partnerships growing in popularity, could provide an expedited affiliation path versus the longer merger and acquisition process, Donkar noted.