M&A In The Fourth Quarter And Beyond

We know that earnings reports follow closely on the heels of every quarter, lagging by a month, give or take. The earnings season provides a time to bask in the glow of past triumphs, cower in the shadow of missteps and adjust strategic and financial projections for what is to follow. Analysts and investors pay close attention to what appears in these reports, and their reactions to the news can either reward or pound a company’s stock price.

In earnings seasons past, buyers would take the opportunity to feature their acquisitions front and center in their press releases and reports. A deal would be trotted out as an example of management’s savvy, and something to advance the company’s prospects and profits. This most recent quarter, not so much.

From the results published in our October issue, we know that the health care industry has been in the thick of a broad-based and diverse M&A market. Still, it was a rare press release that made an acquisition the centerpiece of its earnings report. Mention of a deal, if any, was relegated to the footnotes. Why, then, the difference between this quarter and prior periods?

Earnings reports are all about profits, and as a result of the recent economic turmoil, managers clearly are skittish about highlighting anything that depresses the price per share, even if it makes good strategic and financial sense down the road. And paying for an acquisition typically sends the earnings per share down. Of course, a large measure of the current reticence to emphasize one’s acquisitions is a reaction—an over-reaction some would say—to the current economic environment and tentative recovery. After all, even when the markets were going gangbusters, the making and announcing of a deal held the potential to depress earnings per share, but a company’s stock price was not beaten up due to it, in large part because in better times the investment horizon was farther off. For the time being, however, many have a much shorter focus, on the theory that recovery from the Great Recession must take place dollar by dollar and quarter by quarter. It’s not a matter of choosing one perspective or the other, but of balancing them. Still, when we begin to see more acquisitions featured in earnings reports, we will have a good sign that confidence has returned to the market.

Earnings season and the approach of year’s end have also prompted journalists to reflect on the economy and the markets, which will swell into a series of articles and reports bearing such titles as, “The Year in Review” (catch ours in the January 2010 issue). The venerable Wall Street Journal published an article in mid-October that left us scratching our heads. It stated, “While overall deal activity in the U.S. has tumbled, the value of health-care deals this year is up from 2007 and 2008. Health-care M&A is at an all-time high, both as a percentage of the number of deals and the dollar value of the transactions…” Our staff talked and re-ran the numbers, which didn’t seem to pan out. Our figures indicate that while 2009 will still be a good year for health care M&A, as against all outside expectations, it will fall short of being a record-breaker. At present, approximately $193.0 billion has been spent this year, which places it in contention for third place, but not first.

We were perplexed so we e-mailed the reporter, who clarified the contents for our caffeine-challenged brains. As it turns out, health care M&A deal and dollar volume are at an all-time high as a proportion of M&A deal and dollar volume across all industries. D’oh. Still, this result corroborates what we have been saying all along: health care M&A is a major arena for M&A in general, and one in which investors have either maintained or increased the investment dollars at their disposal.

As health care reform lurches through Congress, it is anybody’s guess what the outcome will be. Uncertainty over the outcome seems to have partially paralyzed deal makers in the health care services industry, whose businesses depend on government reimbursement programs like Medicare. For example, no hospital mergers or acquisitions were announced in October, the first month in many years that the sector went without. As the final shape of reform grows clearer, we expect that businesses will adapt to it and will include M&A as part of their business strategy to meet new challenges.