Foreword by Andrew Chilvers
For ambitious companies eager to expand into overseas markets, often the conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.
If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.
These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.
Florence J Black and Dave Sheppard discussed The Art of Deal Making: Using External Expertise Effectively as part of the M&A Advisory chapter.
How has the M&A landscape changed in the aftermath of the Covid-19 pandemic? Has it changed the nature of deal making in your jurisdiction and which industries have seen most activity?
At MedWorld Advisors, we focus exclusively on the medical industry vertical on a global basis. For example, we sold a Canadian company to an Israeli manufacturer and are selling a US company to a larger business in Europe. In our experience this year during the Covid-19 pandemic, the M&A landscape in healthcare markets has seen a variety of impacts.
In the US, hospitals and clinics have had a difficult time. As the country shut down for the pandemic, elective procedures and even simple office visits were postponed for most of the second quarter. For this segment, it has meant that some hospitals and clinics need new investment or some type of M&A consolidation to stay afloat. We expect more M&A in this segment in 2021 as hospitals and clinics work to stabilize their financial footing.
Within medical manufacturing markets, companies with respiratory products in their portfolio have done very well as demand for those has soared. Manufacturers of devices mostly used in elective procedures suffered greatly thru the second quarter and into the summer.
These dynamics have made M&A valuations more challenging on multiple levels. For sellers that are companies with respiratory products, no buyers want to pay a valuation based on a one-time (we hope) pandemic bump in sales. For sellers that manufacture elective procedure devices, they know their value is greater than 2020’s performance and seek to hold out for “new normal” valuations vs a valuation based on 2020 performance alone.
The good news for sellers is there remain many PE firms with cash (especially in the US, EU, Japan and China) that are focused on this segment. Additionally, we are observing that the key industry strategic M&A activities are at an all-time high. Therefore, we expect M&A to continue into 2021 with reasonable to high valuations.
What advice could you give potential clients on effective pre-deal planning? For instance, preparing a business for sale in your jurisdiction or ensuring transparency for a buyer?
In the medical industry, it is critical that sellers have “the end in mind” before beginning their M&A process. They should think through the sale process to obtain an offer, the diligence period and the transition activity in advance to plan adequately for a successful outcome for all stakeholders in their business.
Some key areas to focus for selling the business that are important for buyers include (1) growth rates (2) innovation and R&D pipeline (3) IP (4) regulatory clearances globally and (5) reimbursement
rates for each country where the seller’s products are sold. Of course, financial (EBITDA) and operational (quality/ delivery) performance metrics need to be well established. And last, but not least, the employee team that will stay with the business has to be ready to take on the future without the current owners, if the sellers are leaving the company.
The good news for sellers in this industry is that many buyers are attracted to the medical industry for its long-term stability. For this reason, sellers can often obtain better multiples from a strategic or a financial buyer if they take care of the previously mentioned items.
The key to a successful outcome is preparing in the beginning by addressing the key areas mentioned to ensure that (1) the story is interesting to a buyer and (2) the story will hold up in diligence. Thinking about your potential buyer is also helpful as we find that a buyer with a clear strategic fit will offer more especially if the timing is right. At MedWorld Advisors, we often state (and experience) “Value = Strategic Fit + Timing®“.
What deal structures prove most effective in your jurisdiction (e.g. asset vs share deals)? Are there any important legislative anomalies that international clients considering a merger or acquisition in your jurisdiction should be aware of?
In the US, often buyers will prefer an asset deal structure as they prefer to not take on any potential liability of the former owners and their business contained in their current entity.
For international buyers coming from outside of the US to invest in a healthcare or medical company, they should do their homework on the US health system. The US healthcare system is constantly evolving due to legislative and court activities as well as current market dynamics.
Interestingly, the key for most segments including hospitals, clinics and manufacturers is reimbursements for products and/ or procedures. The reimbursement may come from the government or from private payors. However, it is what drives the type of care as well as the volume of care for patients. And it flows down hill as the suppliers for these procedures either benefit when reimbursements are healthy or they suffer when reimbursements for certain procedures are reduced or withdrawn.
Additionally, in the US, laws can dramatically vary by each State. Therefore, buyers should be careful to understand the laws of the local city and state as well as the federal laws for the type of business they are acquiring.
Top Tips – Effective Negotiation Strategies In Your Jurisdiction
• Keys to successful negotiations in the medical industry include understanding the value of the business is not simply the EBITDA of the past year. It is the growth rate and the confidence in future reimbursements that will drive higher valuations for certain types of companies.
• To be effective an negotiation in the United States, it is important for the buyer to build a relationship with the seller (and vice-versa) to create trust for those inevitable times during the diligence period that sensitive questions arise. This mutual trust (or lack of it) will often make or break a deal between two parties.
• For the best success, we recommend to sellers to be transparent from the beginning to avoid surprises during negotiations. Maximum transparency early and often can lead to maximum value when the negotiations become difficult as the buyer cannot state they were unaware of the issue.