A stop sign now, COVID-19 will be a bright green light
As the health care industry continues to consolidate, health system leaders face increasing pressure to aggressively acquire scale. For the time being, M&A conversations have been silenced by COVID-19. As resolution of the crisis begins to take hold, M&A needs will again clamor for attention.
“Activity will ramp up as we come out of shelter-in-place,” said Stephen Thome, principal in Grant Thornton’s Health Care Transaction Advisory Services practice. “While COVID-19 slows down the deal flow initially, it will be a catalyst for M&A.” Organizations that were close to a transaction and many that are experiencing financial stress in the COVID-19 crisis will give strong consideration to being part of a larger enterprise to gain strength and sustainability.
Quality of earnings analyses will need to be innovative to address post-COVID-19 financial performance. The traditional historical analysis will have to be augmented by forward-looking views that include immediate- and medium-term projections, and to ramp up to the new normal. Monies received from the CARES Act and FEMA that are still subject to audit — along with investments and expenses required to align to the new normal — will bear scrutiny and will need to hold up under audit. Deal activity will be strong as organizations hit hard financially seek partners. For health systems and private equity firms with dry powder and an appetite for risk, it will be a buyer’s market.
In the meantime, the effects will be exponential.
With diminishing cash reserves and investments — including portfolios residing in self-insurance reserves, pensions, etc. — discretionary spending will decrease, and quality-of-earnings will be affected. Organizations seeking to be acquired and those seeking acquisitions will be scrutinizing these factors and tracking submissions of and payments on insurance claims, and funding through the CARES Act and FEMA. And, according to Steven Sparks, IT Separation and Integration partner: “There will be other factors that'll come into play going forward in not only the diligence process but also all the way through execution.”
In this unique situation, evaluations will be more complex than ever. Both sides of a transaction will be challenged to create a picture of fiscal realities in the search for partners.
There are steps to take now to be informed and prepared. To get the most value from a transaction, it is particularly essential in this environment to look at the full transaction life cycle. This will involve more than looking at the beginning deal terms and due diligence findings. It carries forward into the post-transaction period, being painstaking to ensure you're realizing strategic goals and secure on all points.
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