The Health Care M&A Monthly: Health Care M&A Results for The First Quarter of 2002

During the first quarter of 2001, a total of 201 mergers and acquisitions were announced in 13 sectors of the health care industry. As the chart below illustrates, this represents a 4% decline from the 210 deals announced in the prior quarter and a 3% decrease from the corresponding year-ago quarter. These are the smallest declines in recent memory.
Of these 201 transactions, 124, or 62%, took place in the four sectors of the health care technology segment. This represents a marked shift from both the previous and the year-ago quarters, when the health care services segment predominated in the M&A market. Within the technology segment, three of the four sectors posted increases over the comparable periods. The Medical Device sector alone recorded 51 deals, or one in every four deals announced during the quarter. By contrast, the e-Health sector, sharing in the fate of many dot.coms, posted declines in M&A activity.
The top three sectors of the health care services segment, Hospitals, Long-Term Care and Laboratories, taken together, accounted for 47% of the M&A activity in that segment. In keeping with its role as the crux of the health care delivery system, the Hospital sector recorded the largest number of deals among the nine health care services sectors. But even here, M&A activity was down against comparable periods.
Three other sectors, Home Health, Behavioral Health and Rehabilitation, combined to account for a mere 5% of activity within the services segment. The Balanced Budget Act of 1997 and changes in Medicare protocols continue to cast long shadows over the financial and profitability possibilities of these sectors.
The three largest deals, all with price tags over $500 million, were in the Biotechnology and Pharmaceuticals segments. Only one deal, in the Biotech sector, came with a price tag of $1 billion. By contrast, the largest deal in the health care services segment, valued at $500 million, was announced in the Laboratory sector.
A total of $7.9 billion were spent to finance the first quarter’s 201 deals. Of that amount, $5.5 billion, or 70% of the total, was spent in the health care technology segment.
The overall figures represent a sharp decline from the levels of the previous quarter when a total of $27.4 billion was expended to finance that quarter’s acquisitions. In the fourth quarter of 2001, as in the first quarter of 2002, the health care technology segment predominated, accounting for $22.1 billion, or 81% of the total amount, while the health care services segment accounted for the remaining $5.3 billion.
The chart on the opposite page breaks out the various sectors and the percentage they garnered of dollars spent to finance these deals during Q1:02. Together, Pharmaceuticals and Biotechnology captured fifty cents of each dollar spent in health care M&A activity. At the other end of the spectrum, however, Behavioral Health, Home Health and Rehabilitation have been lumped together because of their virtual inability to attract any capital.
What these figures suggest is that the technology segment, particularly Biotech, Pharma and Medical Devices, will continue to dominate the health care M&A market in terms of deal volume and ability to secure financing for the near term. Total annual deal volume is expected to run between 800 and 850 through the year.
Among services, Hospitals will continue to attract the greatest investor interest. Activity by nonprofit buyers may well increase now that the IRS has set out its rules for treating the tax-exempt debt of hospitals involved in mergers. And as many senior care providers emerge from their reorganization plans and rationalize their holdings, a number of small acquisitions will occur in the Long-Term Care sector. At the bottom of the barrel, the post-acute sectors will lie vegetating in a financial coma.