Recent Dealmaking Influenced By Cash Considerations

Cash is king proved to be a dominant theme in February’s health care M&A market: how to keep it, how to raise it and how to use it wisely. Some companies swapped products so they wouldn’t have to dig into cash reserves to make an acquisition. Others sold off noncore assets to raise capital to fund their ongoing operations. Still others dipped into their cash reserves to make strategic acquisitions at multiples the current market has made attractive. With capital scarcer and more costly in the market, companies are finding creative ways to finance their M&A activity, and many of them are illustrated in this month’s issue.
The current constraints on the cost and availability of credit are naturally changing the ways in which managers look at their companies, which is in turn affecting the ways in which they pursue their M&A strategies. In many cases, cash is simply not available for the grand gesture, so companies now tend to look at smaller and smarter deals. Many are reevaluating the composition of their own portfolios and cannibalizing peripheral units or products by selling them off to concentrate on their core competencies. For many companies, such deals help replenish operating capital without necessarily diluting their stock. As a result of this market-enforced prudence, the deals we are seeing tend to be smaller, more focused and more opportunistic. But make no mistake: companies are not just stuffing the cash in their corporate mattresses; they continue to put it to work either to further research on product candidates, to promote revenue growth for established products or to acquire new ones at bargain prices.
One obvious side-effect of the cash crunch on the M&A market is a lower volume of dealmaking. During February, a total of just 65 mergers and acquisitions were announced in the health care industry; their combined value was approximately $5.8 billion. The bulk of dollars spent, some $5.4 billion, was committed to the four sectors of the health care technology segment, leaving only $411.4 million for the nine health care services sectors. None of the deals broke into the billion-dollar range. By contrast, February 2008 produced 72 deals worth a combined total of $10.0 billion and February 2007 generated 79 deals worth about $13.0 billion. Despite the absence of mega-deals this month, the middle market remains active, as do the basic economic motivations for undertaking an acquisition, merger or takeover. Companies want to capture larger market share, replenish revenue and consolidate fragmented markets, among others.