$226.5 Billion Committed In Second-Largest Year Ever
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Despite fears of impending collapse, 2007 proved to be a very, very good year for the health care merger and acquisition market. Based on transactions we have collected to date, 2007 saw the announcement of 1,051 deals, the highest volume in the period from 2003 through 2007 (see the table on page 16 of the January issue of The Health Care M&A Monthly). This figure represents a 4% increase over the 1,009 mergers and acquisitions announced in 2006. Deal volume steadily rose during 2007 with 238, 248, 273 and 292 transactions from the first through the fourth quarter. The increase in deal volume was largely propelled by the four health care technology sectors, which produced a combined total of 569 deals, a 19% increase over the 477 announced in the previous year. Health care services, on the other hand, fell 9% from 532 in 2006 to 482 in 2007. Three technology sectors, Biotechnology, Medical Devices and Pharmaceuticals, experienced the most robust year-over-year growth with increases of 23%, 27% and 28%, respectively.
Based on prices revealed so far, a total of $226.5 billion was committed in 2007 to fund the year’s M&A activity. This represents a 16% decrease from the record-setting $268.4 billion spent in 2006, but viewed in perspective, it is still the second-largest dollar volume we have ever recorded and stands 38% ahead of the next-largest amount recorded, the $164.3 billion spent in 2004 (see chart on page 3 of the January issue). Of the $226.5 billion committed in 2007, $172.9 billion, or 76% of the year’s total, was in the health care technology segment. The actual dollar amount committed to health care technology was virtually the same for both 2006 and 2007; however, in 2006 technology was just 64% of the total health care M&A dollars. The decline thus came from the health care services segment, which saw dollar volume fall off by 44% from 2006 to 2007. The percentage contribution of each sector to 2007’s total amount appears in the chart on page 2 of the January issue; the figures have been aggregated for the Behavioral Health Care, Rehabilitation and Physician Medical Group sectors because their individual results are so meager.
Big Players And Big Plays
The year 2007 saw the announcement of 50 billion-dollar deals, at a pace of roughly one per week, worth a total of $153.6 billion. The chart on page 16 shows that this is the highest volume for billion-dollar deals during the period from 2003 through 2007, even though the dollar value comes in second to 2006. It’s true that a billion dollars doesn’t quite buy what it once did, but high deal volume at this level suggests that the health care M&A market now has a broader base of buyers with greater access to capital for deal making. Financial buyers, such as private equity groups and real estate investment trusts, announced 51 deals in 2007 worth a combined total of $37.4 billion, or 17% of the year’s total. Despite the bad rap private equity has gotten in the media over the last half-year or so, we believe that it will continue to be one of several drivers in the health care M&A market. True, their investments may be more modest in size, and they may now make partial investments in target companies rather than outright acquisitions of them, but private equity will adjust to the changing business environment and find ways to spend the impressive backlog of capital in their war chests. But in spite of all the press the PEGs have garnered, our figures confirm that the M&A market for health care continues to be dominated by strategic buyers. And for them, the various rationales for deal making—greater market share, diversification, competitive advantage, access to new technologies and new products—continue to persist even though the economic environment is coming to resemble more and more what the ancient Chinese curse called “living in interesting times.”
What’s In Store For 2008
2008 begins with a number of uncertainties, including the lingering headache in the credit markets from the subprime mortgage meltdown. And the politics of an election year will surely impact the health care industry since a number of candidates are nailing the issue(s) of health care into their platforms. We half suspect that some managed care companies, who actually deal with the complexities of the health care system, may direct dollars to campaign coffers rather than to deal making. Credit from other sources may contract somewhat as debt incurred from the Iraq War, as well as rising energy prices, are felt more deeply in the economy. Consequently, the deals that are made will not be as leveraged as before. The falling value of the dollar against other major currencies portends two related trends for the health care M&A market. First, more American companies will be in reach of foreign buyers, so expect more deals to originate from Europe, Japan and India. Second, with the dollar not buying as much abroad as before, American buyers will concentrate on acquiring domestic targets rather than looking overseas. Deals in the Biotechnology, Medical Device and Pharmaceutical sectors will continue to thrive. We also expect to see growth in the “Other Services” sector. These alternative-site and peripheral services, because they are not on the front line of patient care, are not as liable to as many layers of regulation as core services are, and they are more amenable to retail models. In general, we expect to see strong M&A activity for 2008, not because of any Pollyanna complex, but because of what we have been told by bankers, brokers, executives and managers throughout the year. Whenever asked what the prospects are for a company confronting a challenge in the changing business or regulatory environment, the men and women on the front line have responded that smart management finds ways to anticipate and overcome these challenges and make money in new conditions. Faith (and hard work) finds a way in M&A.
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