The Health Care M&A Monthly: August’s Health Care M&A Market--

Eighty-Two Deals Announced Worth $7.2 Billion

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A total of 82 mergers and acquisi-
tions were announced in the
health care industry during August 2007. This represents an 8.9% decrease from the 90 deals announced in the prior month and a 5% decrease from the 86 deals announced in August 2006.

The four sectors of the technology segment garnered 43 deals, or 52% of the month’s total deal volume, while the nine sectors of the services segment accounted for the remaining 39 deals. The Medical Device sector posted 17 deals and was followed by Pharmaceuticals with 13 and Long-Term Care with nine. Together these three sectors accounted for 48% of all health care M&A deals.

Based on revealed prices, a total of $7.2 billion was committed to fund August’s health care M&A activity. Of that amount, the services segment captured $4.1 billion, or 57% of the month’s total, while technology segment accounted for the remaining $3.1 billion.

By itself, the Pharmaceutical sector attracted the greatest amount of capital of any single sector, $1.7 billion, followed by Pharmacy Benefits Managers (a subsector of “Other”) with $1.5 billion and by Long-Term Care with $1.4 billion.

August saw three billion-dollar deals worth a combined total of $3.6 billion, or half of the month’s total dollar value. These transactions were in the Pharmacy Benefits Manager ($1.5 billion), Long-Term Care ($1.1 billion) and Pharmaceutical ($1.0 billion) sectors.

In three transactions, worth an estimated $750.0 million, or just over 10% of the month’s total M&A dollars, the buyers were private equity firms. Four deals, worth approximately $650.0 million were initiated by private equity firms as sellers. Virtually all remaining buyers and sellers in the August market were strategic.

Credit Crunch Or Summer Vacation?

If you’ve been focusing on the credit crunch stemming from the subprime mortgage market meltdown, you might be alarmed that August’s lower dollar value, as compared with July’s, is a signal that this crisis was metastasizing into the M&A market. We believe, however, that this is not the correct comparison to make. As the table on page 2 of this month's issue shows, August’s dollar volume traditionally drops off more than 60% from July’s level, suggesting as much as anything else that bankers, brokers and dealmakers are taking their summer vacations. Those left manning their desks are typically engaged in tying up existing deals in time for the Labor Day weekend.

While the credit crisis is probably contributing something to the drop in dollar volume from July to August, we believe this historical comparison shows that its influence is not as dire as suggested just by looking at this year’s figures in isolation. The true impact of the subprime mess will probably be known only after some months and after lenders have readjusted their criteria.

The Longer View

What we are seeing now is the absence of very large deals in the market. Part of this is likely due to a decrease in the availability of debt financing due to the credit crunch, but basic valuation issues remain a major factor. Until the stock market corrects and stabilizes, buyers will prudently hold off making deals so they don’t overpay for a publicly traded corporation whose share price may stand to lose a few more percentage points. It’s just a simple matter of balancing “sell high,” which we have seen plenty of this year, with the corresponding “buy low.” The mindset now prevailing seems to be one of wait and see who will jump back in the water first.

Taking the longer view, from January through August, there have been 645 deals (2006, 694) worth $166.7 billion (2006, $153.7 billion). Even if the M&A market stopped dead in its tracks four months short of December, 2007 would still be the second-largest year ever in terms of health care M&A dollars committed, after the record $267.1 billion committed in all of 2006. Year to date, 2007 already surpasses both the $162.2 billion posted in full-year 2005 and the $164.3 billion recorded in full-year 2004. Figures like these suggest a robust underlying M&A market and go a long way towards explaining why we don’t subscribe to Chicken Little’s belief in its imminent demise.