The Health Care M&A Monthly: Health Care M&A Results For 2006 -
A Record Year By The Numbers
As we noted in December’s issue, 2006 posted record-breaking activity in the health care M&A industry. Based on preliminary figures (more deals will likely be mined from the annual reports appearing over the next 90 days), a total of 991 mergers and acquisitions were announced in the 13 sectors of the health care industry that we cover. This is the highest volume reported in the past six years (see the chart on page 16).
The nine sectors of the health care services segment recorded 520 deals, a 1% decrease from the 527 in the previous year, while the four sectors of the health care technology segment recorded 471, a 6% increase over the 443 deals announced in 2005.
The three most active sectors in both 2006 and in 2005—and with the same ranking—were Medical Devices with 150 deals (2005, 141), Long-Term Care with 143 deals (2005, 129) and Pharmaceuticals with 137 deals (2005, 128). Taken together, these three accounted for 43% of the year’s deal volume. E-Health saw a 13% increase in 2006 deal volume, followed by Long-Term Care with 11% and Laboratories with 10%. On the flip side of the coin, Home Health posted a 27% decline followed by Managed Care and Rehabilitation, both of which saw a 10% decrease in M&A activity.
What They Paid
The figures in the tables on pages 3 and 16 firmly establish that 2006 was a banner year in terms of the total dollars committed to fund the year’s M&A activity. The $260.7 billion committed in 2006 represents a 61% increase over the $162.3 billion in 2005 and a 59% increase over the next-highest $164.3 billion posted in 2004.
As we have come to expect, technology sectors led the pack, capturing $171.8 billion, or 66% of the year’s total. This represents a modest percentage decrease from 2005 when the technology sector garnered 71% of all the capital invested in health care M&A. Among the individual sectors, Pharmaceuticals led with $77.1 billion, or 29.6% of the year’s total. It was followed by Medical Devices with $53.5 million (20.5%), Biotechnology with $36.4 billion (14.0%), Hospitals with $34.9 billion (13.4%) and Long-Term Care with $22.5 billion (8.6%). Straggling and struggling at the other end of the spectrum, the Rehabilitation sector posted a paltry $153.0 million (although this does represent a hopeful 60% increase over 2005’s dismal results).
As may be seen from the table on page 16, a total of 35 billion-dollar deals were announced in 2006 with a combined dollar value of $200.1 billion, accounting for 77% of all health care M&A dollars spent during the year. The year’s largest deal, the $33.0 billion privatization of hospital giant HCA (NYSE: HCA) by a consortium of private equity firms, was the largest deal ever in the Hospital sector though smaller than some mega-deals in the Pharma industry.
During 2006, but particularly during the second half, pundits devoted a lot of space to discussions of the shrinking premiums that acquisitions of publicly traded corporations were commanding in the market. Word on the street and in print asserted that the "big deal" premium, for transactions worth more than $500 million, had all but evaporated in 2005. Maybe some investment banker touted this juicy factoid as a justification for CVS’s (NYSE: CVS) recent $21.0 billion bid for pharmacy benefits manager Caremark Rx (NYSE: CMX), which carried no premium whatsoever. It has also been bandied about as an indication that current M&A is more disciplined than it was in the go-go, buy-anything-that-moves dealmaking of the mid-1990s.
Despite rumors of its demise, most M&A analysts tend to agree that the average 2006 acquisition premium hovered around 20% above the target’s stock price, generally but not always defined as the day before the deal was announced. We ran our own numbers to see how health care M&A compared with all of M&A during the year. The vast majority of transactions for which we have relevant data are in the technology segment.
By our calculations, the average acquisition premium commanded in all of health care was 31%, the median 29%, some 50% more than the average for M&A across all industries. Biotech deals commanded the highest premiums with an average of 42.8% (median, 40.0%), followed by Pharma with an average of 27.5% (median, 29.0%), e-Health with an average (and median) of 24.3% and Medical Devices with an average of 22.9% (median, 21.0%). Biotechnology appears to have attracted the highest premiums—or so we can imagine consultants advising their clients—as a reward for the risk that (selling) investors have made in an industry which as a whole has yet to generate a profit. Pharmaceuticals follows in second place not just because of its increasing involvement in the biotech industry, but also because of the tasty profits that can be reaped from sales of branded and generic drugs—Pfizer’s (NYSE: PFE) blockbuster Lipitor generated a healthy $12.7 billion last year). Medical Devices, as perhaps the most "mature" and least risky sector, most closely approximated the overall average premium for all industries.