by Alan Hymowitz, CM&AA
Each year typically brings at least some unforeseen developments that influence healthcare transactions. Oftentimes, these occurrences affect a single sector or just a few sectors. Rarely, if ever, is there an unexpected event that touches numerous marketplaces, let alone all of them, and does so in a dramatic way.
Well, 2020 brought us the COVID-19 pandemic — a (hopefully) once-in-a-lifetime event that immediately and drastically affected every healthcare sector and continues to do so today. It will be some time before we can fully appreciate and understand just how significant of an effect the public health emergency (PHE) had on the overall healthcare industry.
However, now that we’re approaching the one-year anniversary of the World Health Organization declaring COVID-19 a pandemic (March 11, 2020), some of the PHE’s short- and longer-term impacts on healthcare transactions are becoming clearer. At least one thing seems certain: 2021 is likely to be a year of substantial merger and acquisition (M&A) activity. Here are five of the reasons why.
1. Release the capital!
The tremendous uncertainties around the pandemic motivated many investors to enact stricter financing guidelines as a way of spreading investment risk out more evenly between buyer and seller. We saw firms increase the amount of rollover equity and earnouts and/or require longer earnout periods from sellers than pre-PHE. Even though money was available to finance deals, these guidelines made it much more difficult to finalize transactions. Some investors were simply more reluctant to finance deals during the pandemic. Now that there is seemingly a light at the end of the pandemic tunnel with the national vaccination rollout, there is much less reluctance by investors to spend their capital. And considering most investors spent much less than they expected in 2020, a lot of capital is now looking for homes.
2. Pent up demand
Not only is there a lot of capital available, but a lot of companies will be looking for buyers in 2021. These can essentially be broken out as follows:
- companies that were already on the market in 2020 but came off due to uncertainties around the pandemic;
- companies that went and stayed on the market in 2020 but were unable to complete a transaction;
- companies that were planning to hit the market in 2020 but held off due to the pandemic;
- companies that were already planning to pursue a sale in 2021; and
- companies that decided to move up the date they planned to sell because of pandemic-related developments — good and bad.
With so many companies already on or coming on the market this year, investors have an opportunity to spend a lot of their capital and complete numerous transactions. It is important to acknowledge that the PHE put some companies out of business and forced others to push back when they intend to sell. However, unlike some other industries (e.g., airlines, restaurant, entertainment), healthcare was modestly impacted by the pandemic. In fact, McKinsey & Co. estimated that the healthcare and social assistance sector would easily be the fastest to recover to pre-COVID-19 sector GDP.
3. “Winners” from 2020 seeking new assets
Generally speaking, the pandemic had one of three effects on healthcare companies: little to no effect; devastating effect; and a positive effect. For select healthcare sectors and companies, 2020 delivered a banner year for growth. Some companies found themselves the beneficiary of required changes to the delivery of care. Others saw an opportunity to meet a need and went after it. These include companies providing telehealth-related services, mail-order pharmacy services, a variety of software solutions, and some durable medical equipment. For many of these companies, sales spurred on by developments around the PHE have begun to level off or are starting to decline. Such companies, looking for ways to generate the momentum required to sustain growth, are seeking to acquire businesses that can allow them to expand into new business lines. This is introducing a new group of previously unexpected buyers into the market.
4. Large companies looking to get bigger
Many larger healthcare companies are looking at 2021 as the year they will make up for lost opportunities in 2020. Now that it appears there will be an end to the pandemic this year, these companies are feeling much more comfortable about taking out their checkbooks and allocating time and resources to finding acquisitions that can help grow their empires.
5. Optimism fuels deal rebound
When there is optimism about the future, deals are more likely to happen. And while there’s still a lot of work to be done to get through the pandemic, there is a growing sense of optimism about where the country and healthcare industry is heading. This is attributable to the vaccine rollout and signs of economic growth, among other issues. There is the expectation that 2021 will be a better year than 2020 — and one certainly hopes that will be the case. That alone is generating the kind of excitement for making deals that will further propel more transactions to the finish line this year.
Making an M&A Prediction
Not only do I believe that 2021 will be a significant year for healthcare transactions, but I feel comfortable predicting that M&A activity within the industry will return to pre-COVID levels within 12 months. At VERTESS, we’ve had a significant uptick in queries from buyers and sellers since the start of the year and expect that momentum to pick up as the year progresses. It looks like 2021 will be a great year to buy and a great year to sell. If you’re looking to do either, we’re here to help!
