The Health Care M&A Monthly: Second Quarter 2009 M&A Results--
Deal Volume Rises 12% Over First Quarter
Based on results now available, the merger and acquisition market in the health care industry generated 228 deals during the second quarter of 2009. This figure represents a 12% increase over the 203 deals recorded in the first quarter but an 18% decrease from the 279 deals in the year-ago quarter, Q2:08. This increase marks the first time in over a year that M&A deal volume has risen against the previous quarter.
Health care technology captured the lion’s share of M&A activity. The four sectors of the technology segment posted 145 deals, or 64% of total deal volume, with the nine sectors of the health care services segment accounting for the remaining 83 deals (36%). As a further indication of technology’s dominance in this market, the top three sectors combined, Medical Devices, Biotechnology and Pharmaceuticals, accounted for 55% of Q2:09’s total transaction volume. At the other end of the spectrum, the Behavioral Health Care sector, now dormant, recorded no activity whatsoever. The results of the individual sectors, along with comparisons to the previous and year-ago quarters, appear in the table opposite.
The lopsided proportion of 64%-36% between technology and services deals is a marked departure from the 55%-45% split that had typically existed between the two segments for several years before last summer’s market plunge. While the current dearth of capital to fund acquisitions in the services sectors, particularly those with a real estate component such as hospitals or long-term care, may account in part for this skewed result, we also believe that uncertainty over the shape that health care reform will ultimately take is causing queasiness and extra caution in the investment community. The threat of possible changes to government reimbursement protocols makes it difficult to estimate the revenue and cash flow of businesses that are dependent on Medicare and Medicaid reimbursement, which in turn makes it more difficult for potential buyers and sellers to agree on the proper valuation of these businesses.
What They Paid
Based on the figures currently available to us, a total of $27.9 billion was committed to fund the second quarter’s M&A activity. Health care technology deals captured $22.7 billion, or 81% of the total amount, with services deals responsible for the remaining $5.2 billion. The percentage contribution of each sector to the total for the quarter appears in the chart on page 9 of the July issue of The Health Care M&A Monthly. Note that the results for five of the services sectors were so negligible that they had to be aggregated.
Though on the face of it, the second quarter amount represents a spectacular drop from the $127.5 billion spent in Q1:09, it must be recalled that the first quarter’s total includes two mega-deals, Pfizer’s (NYSE: PFE) $68.0 billion acquisition of Wyeth (NYSE: WYE) and Merck & Co.’s (NYSE: MRK) $41.1 billion purchase of Schering-Plough Corp. (NYSE: SGP). Eliminate these two blockbuster transactions, and the amount committed to second quarter health care M&A rose by 52% over the adjusted first quarter figure. The second quarter posted eight billion-dollar deals worth a combined $15.7 billion, or 56% of the quarter’s total. By contrast, the first quarter produced just four billion-dollar deals worth $113.3 billion, or 89% of Q1:09’s total amount.
The second quarter results are promising and should be given their due when considering a deal, but they do not suggest an imminent return to the go-go days of dealmaking in the 2005–07 period. As our story on Medical Device M&A suggests, dealmakers are more deliberative and focused, taking more time to see a deal through, in no small part because of the challenges of putting together a financing package. They are setting their sights on more focused transactions in the middle market, generally avoiding grand, transformative deals. In targeting companies or products, buyers are not straying too far from their core competencies. Some sellers are being motivated by financial pressure: to streamline operations, raise cash or stave off the specter of bankruptcy. Still, fortune appears to favor the brave. A recent study from the Towers Perrin/Cass Business School indicates that the stock markets have rewarded companies bold enough to undertake an acquisition post-Lehman Brothers. Though companies that made deals worth $100.0 million or more suffered an average 25.5% fall in their stock price, as a class they outperformed the wider market by 6.3 percentage points. Perhaps less worse is the new better.