The Health Care M&A Monthly: Health Care’s Big Spenders In 2008--
24 Buyers Spent Over $1.0 Billion Apiece On M&A
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We have observed in the past that buyers and sellers in the
merger and acquisition market tend to use the period from Thanksgiving through New Year’s Day to wrap up the deals they announced earlier in the year. As a result, new M&A activity, though present in December, is often muted. This brief lull in M&A allows us to review 2008 and identify who the most active buyers were in the health care industry, how much they spent and what sectors they targeted.
What They Paid
From January through the end of November, 123 buyers announced two or more mergers and acquisitions in the health care industry, accounting for 356 transactions, or 40% of that period’s 884 deals. The combined value of these 356 deals is $159.6 billion, or 74% of the $214.9 billion committed to fund the year’s M&A activity so far. This signals a departure from the corresponding period in 2007 when "serial" acquirers accounted for 46% of the deal volume but just 47% of all dollars spent.
Much of this year-over-year difference may be explained by two mega-deals, proposed by Swiss companies in 2008, which appear to skew the results. One is Roche Holding’s (SWX: ROCZ.s) $43.7 billion acquisition of the 44.1% it does not already own in the biotech company Genentech (NYSE: DNA); the other is Novartis AG’s (NYSE: NVS) acquisition of a 77% interest in vision care specialist Alcon (NYSE: ACL) for $39.0 billion. The largest deal in 2007, by contrast, was Schering-Plough Corp.’s (NYSE: SGP) $15.8 billion acquisition of Organon BioSciences, a transaction less than half the size of either of 2008’s potential blockbusters. We feel compelled to add the qualifier "potential" since, despite several reassurances by Roche, certain media outlets and investors remain skeptical of the company’s ability to put together a financing package for this deal in the current credit crunch. We tend to view this as a case of idleness in pursuit of a story now that newsmakers are looking for something to write about after the November elections. And, subsequent changes in DNA’s share price could help keep the deal alive. DNA demurred when Roche first offered $89.00 per share, which at that time was an 8.8% premium, but with DNA’s stock now at $75.00 per share, that premium has effectively doubled. Bottom line, until we hear that Roche has thrown in the towel, we shall continue to include this transaction in our results.
Looking at 2008 from another perspective, 24 buyers—including those who acquired singletons as well as multiple targets—spent $1.0 billion or more on health care M&A (see the table on page 3 of the December issue of The Health Care M&A Monthly). They announced a combined total of 73 deals worth $176.4 billion. This result contrasts with the comparable cohort (billion-dollar spenders) in 2007 when 46 organizations announced 130 deals worth a total of $158.4 billion. Again, the two mega-deals effectively skew upwards results that might in retrospect have been expected to fall against 2007’s levels.
Who They Targeted
Among the billion-dollar spenders in 2008, only CVS Caremark (NYSE: CVS) and The Blackstone Group announced deals targeting businesses in the health care services segment. They each announced one deal; their combined value is just $4.5 billion. Accordingly, the vast majority of 2008’s dollars flowed to businesses in the health care technology segment. In 2007, by contrast, 14 billion-dollar spenders had made 30 acquisitions in health care services worth a combined total of $34.7 billion.
The health care services sectors did not disappear entirely from the 2008 M&A market, however. The most prodigious buyers of 2008 in terms of deal volume are listed in the table on page 7 of the December issue of The Health Care M&A Monthly. Of the year’s 123 "serial" acquirers, 79 made two deals, 17 made three deals, 12 made four deals, five made five deals and nine made six deals or more. The most aggressive buyer turns out to be home health operator LHC Group (NASDAQ: LHCG) with 14 deals, just ahead of big pharma GlaxoSmithKline (NYSE: GSK) with 13. With 11 deals, Pediatrix Medical Group (NYSE: PDX), a physician practice management firm, is the only other acquirer to break into double digits. Thirteen of the top 26 buyers by deal volume are in the services sector.
Apart from the obvious fact that big spending in 2008 was concentrated in fewer hands than in 2007, two other differences emerge from the data. In 2007, 14 of the billion-dollar buyers were financial buyers who announced a total of 17 deals worth $37.7 billion. But in 2008, there were just three financial buyers who announced just three deals worth a combined total of $7.1 billion. The deleveraging of the economy in the credit crunch/recession has strongly curtailed the ability of private equity shops to make big acquisitions with, say, 10% equity and 90% debt, an acquisition strategy that was all the rage two years ago. However, the strategic buyers, who have always captured the lion’s share of health care M&A, remain in the market.
Where They Come From
The second change we observe is in the mix of domestic versus foreign buyers. In 2007, among the 10 top spenders, six were domestic firms who committed a total of $47.2 billion to health care M&A while four foreign firms committed a total of $35.2 billion. Fast forward one year and among the top 10 spenders, we find eight foreign firms spending $134.7 billion and just two domestic firms spending $13.3 billion. With the dollar at a low against a variety of currencies, a once-in-a-quarter-century window of opportunity has opened for foreign buyers eager to enter or expand in the world’s single largest health care market.
The raw numbers for 2008 are pretty impressive for a period that we just discovered has been in recession since December 2007 (good of the media to spot that). Final statistics for 2008’s deal and dollar volume will appear in our January 2009 issue, but from where we currently stand, they appear to be just slightly off the corresponding figures in 2007, which was the second best year for M&A ever.
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