By Bruce W. Dmytrow, Senior Vice President, Healthcare, CNA
The financial strain of the COVID-19 pandemic encouraged companies to reevaluate goals and in some cases their business models. For a number of healthcare organizations, the pandemic has helped to accelerate decisions regarding their M&A strategies. In fact, a recent survey conducted by Bank of America noted that despite a slowing of M&As in the second quarter of 2020, 69% of respondents stated that their healthcare organizations are either exploring M&A opportunities or will be completing such deals in the next 12-18 months.
An M&A can be a valuable strategic decision for a healthcare organization, in providing opportunities to increase capabilities, expand market share, diversify product/service offerings, enhance market brand and strengthen competitive position. Advantages for the acquired organization – on the other hand – can include capital to purchase new equipment and/or professional staff and expertise to offer expanded services in order to more effectively compete in its market.
In recent years, the number of private equity firms seeking to strategically expand into the healthcare industry continued to increase, especially through investments in medical practices, dental offices and urgent care centers. While an offer from a private equity firm may be attractive, understanding the advantages and disadvantages of such arrangements is paramount. Moreover, despite the impact of the pandemic on the senior housing market, real estate investment trusts (REITs) continue to invest in senior housing in order to diversify their portfolios and maximize potential return on equity.
As healthcare organizations and investment management companies expand their investment strategies, it is important to recognize that some of the most successful arrangements are the result of organizations understanding the risks associated with the investment as well as assessing the cultural alignment with organizational missions, visions and values.
Navigating the Risks
An M&A represents a significant investment, especially with respect to accomplishing a company’s short-term and long-term goals. Before undertaking an M&A, both organizations must clearly delineate the services they wish to provide, geographic expansion opportunities and how the M&A will support the missions and visions of each company.
To maximize results, the purchasing company should complete a thorough and comprehensive due diligence process led by a multidisciplinary team prior to the transaction. This protocol will enable the organization to identify actual exposures and map out potential risks related to financial metrics, claim activity, and reputational vulnerabilities. In addition, understanding the litigation environment, costs associated with current and future insurance programs, as well as property exposures related to geographic climate changes, can help prepare the investing company to effectively manage potential financial risks.
According to McKinsey, approximately 95% of executives indicated “cultural fit” as critical to the success of integration. Yet, 25% cite a lack of cultural cohesion and alignment as the primary reason integration efforts fail. Challenges may arise when integrating and aligning cultures, sometimes resulting in employee dissatisfaction. Therefore, building trust by establishing morale initiatives focusing on diversity and inclusion will help to manage these challenges. In addition, conducting a cultural match analysis before completing an acquisition will identify similarities and differences that must be considered and addressed. The cultural match analysis should include, but not be limited to, a review of the following:
- Leadership styles of each company
- Talent at all levels
- Diversity and inclusion programs and initiatives
- Employee support programs, including benefit packages and wellness opportunities
- Operational policies, procedures and protocols
The surge of prospective M&A activity in the healthcare industry will generate numerous discussions throughout any organization. These internal exchanges of information and perspectives will become critical factors determining whether the M&A represents a sound decision and ultimately becomes a success or failure. Scrupulous planning and preparation will help to create a clear path to the successful merge of two disparate organizations – with minimal bumps in the road.
Bruce W. Dmytrow, Senior Vice President, Healthcare
Bruce is Senior Vice President at CNA and has been with the enterprise since 1995. He is responsible for developing strategic and tactical direction for the growth and profitability of the global Healthcare Customer Segment. Bruce received a Bachelor of Science degree, cum laude from Boston College, a postgraduate degree in medical dosimetry from Yale University Medical School/Yale-New Haven Hospital, and a master of business administration degree in entrepreneurship, with highest distinction, from DePaul University in Chicago.