The health care industry’s last 10 years have been characterized by dynamic and paradigm-shifting changes, and yet, in some ways, many of the healthcare industry’s key sectors look and feel the same they always have. Ten years ago, the universe of health care financial investors largely included those that had invested significant efforts to understand the complexities associated with providers and related reimbursement risks. As such, within the provider care sector, these private equity investors tended to compete with strategic buyers for opportunities to buy and build multi-location provider care business in both acute and post-acute care settings. Despite some cyclical reimbursement influences, these business models, and the related M&A activity, are generally the same 10 years later.
However, in the last 10 years, the counter-cyclical nature of health care and its ever-increasing contribution to the United States Gross Domestic Product has drawn many financial sponsors to an industry others previously viewed as too risky due to regulation and complexity. More importantly, the numerous changes influencing the industry have prompted private equity recognition of investment opportunities. In the last five years, the deal landscape has seen the dramatic influences of healthcare reform with The Patient Protection and Affordable Care Act, increased regulatory scrutiny, continued shift to outpatient settings of care, a rush to physician employment, healthcare consumerism and sector-specific reimbursement cuts and payment model changes. As a result, we witnessed robust and unparalleled M&A activity during the last decade.
The influences driving industry change created new business models and, thus, new opportunities for investment. We’ve seen private equity investment in companies poised to bend the cost curve or capitalize on evolving and uncertain payment models (e.g., bundling, pay for performance, etc.). These emerging business models are both broad and deep – examples include (i) companies founded to manage post-acute care delivery to patients in evolving bundled payment models and (ii) technology-based concerns that optimize care coordination and reduce unnecessary utilization. Simply, the innovation and entrepreneurialism underpinning business models that didn’t exist ten years ago significantly grew the number of financial sponsors investing in the industry.
The next five years promise similar opportunities (and challenges), as we’re on the precipice of evaluating the impact of a number of key industry changes, including the impact of value-based payment models, accountable care organizations, etc.. With the American demographic as it is, healthcare – the provision of and payment for healthcare services, industry innovation, capital market influences and the like – will continue to drive tremendous investment opportunities underpinning M&A growth.
Completing a Sell-Side Due Diligence exercise prior to commencing a transaction process was once unheard of domestically. However, this has quickly become the norm rather than the exception. According to Hiter Harris, Managing Director and Co-Founder of Harris Williams, “Seller commissioned QofE reports have been routine in Europe for years but now are gaining frequency in the U.S.”
Sell-Side Due Diligence involves the preparation of a Company’s financial accounting, tax, human capital, and operational “story.” The processes and skills used by third party professionals when performing Sell-Side Due Diligence are very similar to those used during Buy-Side Due Diligence. However, a key difference is the benefit of time to prepare and full cooperation from company management, resulting in a more thorough and accurate assessment of the company being sold.
Areas of assessment include the quality of a company’s earnings, working capital requirements, tax structuring considerations, as well as human capital and operational considerations. The outcome of these procedures is often shared with prospective bidders and lenders. In other instances, the findings are used by the company as a tool to understand itself through the lens of prospective bidders and as a dry-run for the upcoming process.
Sell-Side Due Diligence has become accepted in the market because it benefits all participants in a transaction. From the seller’s perspective, it is a key tool in maximizing exit value and proactively getting in front of potential pitfalls. From the investment banker’s perspective, it is a driver for speed and process efficiency. For bidders, it is a chance to understand the prospective investment without investing an extraordinary amount of effort and expense. Bidders still ultimately perform their own diligence and engage their own third party professionals. However, when Sell-Side Due Diligence is performed correctly buyer’s diligence often becomes a confirmatory rather than exploratory exercise. Harris further comments, “It’s smart to take time to do this in many cases. Preparation is always a benefit.”
Sell-Side Due Diligence has been an important part of A&M’s growth. During FY15, the volume of sell-side projects completed by A&M increased by 135% over the prior year. A&M’s growth in this area has not only been domestic. A&M’s Transaction Advisory Group is global. Its Europe, Asia, Latin America and India due diligence teams have experienced increased demand for Vendor Due Diligence (VDD) services. Those teams have extensive experience in providing Vendor Due Diligence services and thoroughly understand the VDD process.
Planning a public exit? No problem. A&M’s Capital Markets and Accounting Advisory team can help. An early assessment of the company’s ability to operate as a public company will ensure that it is prepared to launch when the timing is right. Unrestricted by audit-based conflicts, our team provides dedicated, hands-on resources throughout the IPO process – working with management, its auditors and attorneys to ensure quality, timely results.
A&M’s Keys to Success are its focus on quality, senior-level involvement, speed, and flexibility in approach. Following a successful exit process, A&M is regularly sought out for new exit opportunities by bidders and intermediaries who witnessed and experienced A&M’s approach. Time and time again, the quality and consistency of the team, speed and efficiency of the process, and overall, lack of subsequent surprises is what has made A&M a global leader in the space.
In the last 10 years, the software & technology space has grown on its own in the pure play tech space, as well as for companies in regulated sectors where hi-tech solutions are addressing rapid change – particularly in health care information technology (HCIT), financial services technology (Fintech), and security.
Healthcare-related software companies in particular have driven substantial growth in the space. This was driven in part by the demands of adhering to new regulations, especially those instituted as a result of the Affordable Care Act. In addition, HC insurance companies have been slow to adopt technologies to improve efficiencies. Pushed in part by the ACA regulations, large insurers are buying up software companies to quickly ramp up to 21st century technological solutions.
Financial technology companies – have transformed how B-to-B and B-to-C transactions take place. Think Apple Pay, Square and Pay Pal. In the last several years, the demand for “payment processes” has driven phenomenal growth. Business and consumers want to transact securely online.
Furthermore, the need to mitigate the risk of being hacked, in light of several high profile global security breaches at companies around the globe, has led to an increased investment in tech security companies. In particular, companies offering “endpoint and perimeter cybersecurity solutions– solutions that seek to prevent attacks at the point of network access – are numerous. Consolidation of these companies offers a ripe opportunity for tech investors (“Deal Drivers Americas 2015”, Merger Market, 2015).
In today’s ever-competitive environment with multi-round auctions and accelerated timeframes, it has become increasingly more critical to have the right industry expertise. Our dedicated team of seasoned S&T professionals collectively looks at over 100 software and technology companies each year. With our extensive experience and know-how, we can quickly analyze key value drivers and help you assess and validate your investment thesis early in the process.