The Health Care M&A Monthly: Services Deal Volume Rises--

May’s Figure Reaches Highest Level For 2009

Despite rumors of its impending demise, the health care services segment posted the highest level of M&A activity for the year, as measured in deal volume, during May. After bottoming out at 18 deals in March, volume rose to 24 in April and 31 in May. And though such isolated month-over-month comparisons are of limited value in assessing trends in this market, they appear to parallel the fall and rise of other markets this year, notably the markets for public equities.

However, nearly one-third of May’s mergers and acquisitions in the services segment came from a surge in Home Health Care deals; this sector posted 10 transactions during the month. Most of the other services sectors posted just two or three transactions. Still, this is in keeping with their relatively meager results since the beginning of the year.

With the exception of April, when $4.9 billion was spent on health care services M&A, the services segment has averaged about $400.0 million per month so far this year. The approximately $39.5 million spent in May would therefore suggest a rapid slowdown in the market. Here again, the limited usefulness of month-over-month comparisons may be leading us astray somewhat. It seems probable that if two or three prices for May’s hospital deals were revealed—and we think this likely by the end of the second quarter—the monthly amount spent on M&A would probably rise to the average emerging for the first half of the year. What we thus wind up with is some ambiguous evidence that the market for health care services has bottomed out and is sputtering towards recovery, even if it is not yet hitting on all cylinders.

Deal or No Deal? We believe that there are still buyers and sellers, brokers to bring them together and bankers to fund their deals in the health care services M&A market. The infrastructure for dealmaking remains intact. Part of the reluctance in undertaking deals, however, may be a matter of psychology or prudence, depending on how you view it. We believe that many dealmakers are waiting to see how the looming battle on health care reform shapes up. Changes as massive as the new administration promises are likely to result in big and, perhaps, unforeseen changes to reimbursement protocols. This directly affects providers’ (and payors’) revenue and could also raise issues of continued profitability in some quarters. So no matter how strong the will to see a deal through is, if the parties to a transaction cannot readily agree on estimates of future revenue, cash flow or net income, they will be at a loss to value a company or set its price tag.

Change can be positive as well as negative, however. One facet of the Obama health initiative is to find a way to provide health insurance for the 45 to 50 million uninsured in the country. This implies that additional scale will be needed to service this additional population, and on a more nationally oriented basis. And a time-tested way for payors and providers to work towards that kind of scale is to acquire it in the M&A market.