hospital impact - Private equity and M&A booming in healthcare

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Private equity and M&A booming in healthcare

April 13th, 2007

by Tony Chen

Is it me or has there been a tidal wave of healthcare-related private equity and investment deals recently?

Here are the highlights of recent healthcare private equity & privatization activities:
- HCA went private for $21B - the biggest LBO in history at the time.
- USPI went private for $1.8B - by far, they are the largest surgery center operator in the country
- Texas Pacific Group, a private equity firm, bought HealthSouth's surgery division for $945M
- Many speculate that we aren't done yet. I'm betting on LifePoint as the next big deal to break - this would be ~$2.5B deal.

On the M&A side of things, there's been quite a bit of activity
- Triad & CHS $7.1B Merger (which really could count as a privatization)
- CVS bought MinuteClinic for $180MM or so. I think this signals a strategic bet from CVS management - they think that healthcare is the product/service differentiator they've been looking for to drive the next wave of in-store traffic growth.
- Hospitals also continue to buy each other out - there has been a lot of activity of late. 2006 was a banner year with 57 hospital transactions. Since the bottom-out of 2003, hospitals continue to be active. Turned-around or desperate-for-a-turnaround hospitals are the most attractive targets.
- Maybe the hottest area (but under the radar) is senior care - more are opening and many are being bought out at record prices. There's less red tape, a lot of market fragmentation, and baby boomers flooding the gates.

I won't even get into the other sectors of healthcare, except to say that CVS bought Caremark for $26.5B and Pharma companies announced 10 deals in February worth $7.5B. It's a good time to be a dealmaker.

What all of this tells me is this:
* We shouldn't be surprised as this is a cyclical phenomena. I've heard experts talk of the 10-year cycle, and right now we are on the upswing.
* I don't think this is specific to healthcare, though healthcare is one of the hottest sectors right now for VCs.
* The outsiders (the financiers) and the insiders (hospital leadership) are looking at the same businesses. But the outsiders see more value in these businesses. Is the hospital industry going through a strategy make-over?

41 comments

Comments:

Comment from: Self Help Zone [Visitor] · http://www.selfhelpzone.com/

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04/13/07 @ 09:46

Comment from: Joseph Kirchner [Visitor] · http://www.mvrmc.org

"But the outsiders see more value in these businesses. Is the hospital industry going through a strategy make-over?"
Very astute observation. Are you aware of any literature on the ability of non-profits, relative to for-profits, to adequately respond to such change?

04/13/07 @ 11:18

Comment from: Hospital Impact [Member]

Joseph, I haven't seen any literature or data that this is the case. How do you measure "market responsiveness?" Profitability might be a good measure, but taxes/reimbursement skew it.

04/13/07 @ 11:25

Comment from: Tim Gee [Visitor] · http://www.medicalconnectivity.com

Health care as an industry is especially resistant to change, be they attending physicians, nurses and techs or hospital administrators. The real opportunity - and what will be demanded by new owners from outside health care - is to make fundamental changes in how care is delivered. These changes will reduce costs while improving patient safety and outcomes.
This is not a game of reducing head count and trying to do the same old things with fewer people. That is a recipe for disaster. The bolus of baby boomers will drive a lot of changes, and those that thrive and excel in the future will be those that embrace change .

04/17/07 @ 13:08

Comment from: Hospital CEO [Visitor]

For those interested in pursuing an article I referenced earlier by Vernon Weckwerth, PhD it was published in the Frontiers of Health Services Management 22:4.

Vern is the Dean of the Independent Studies Program (MHA) at the University of Minnesota. His article and others in that publication focused on the differences between for-profit and non-profit healthcare facilities.

04/19/07 @ 11:12

Comment from: Healthcare Venture Capitalist [Visitor]

As someone who has been involved in healthcare on all four ends (patient, individual provider, financier, and operational provider), I disagree with virtually every single one of Tony's (CEO) comments.

The current trend in LBOs is not due to the pressure to deliver shareholder value so much as it is the exploitative nature of the LBO business. Taking companies private allows them to hide their financials and operating procedures. This is precisely why there have been many large buyouts of highly profitable companies recently (eso TXU and Sallie Mae). It allows these companies to carry on with their deceit and fraud. You won't see this theory in journals because academia is clueless. Use must use your own common sense if you want to understand things.

All of healthcare in America is in crisis. In short, healhcare is the biggest problem this nation faces, responsible for the record outsourcing trend we see today.

Healthcare is NOT a safe investment. If you are defining healthcare as medical services, it is by no means safe because that segment is run as poorly as the Big 3. The only difference is that medical services in America have an effective monopoly due to geograhphical advantages, which makes most large entities profitable.
Tony, I hope you are not managing your own assets. As a former institutional asset manager and merchant banker, I understand market dynamics well. You have implied that healthcare has a negative correlation to other traditional asset classes. Absolutely inaccurate. Only gold (and other precious metals) and REITS have clear negative correlations to these assets.

04/26/07 @ 00:51

Comment from: Mark [Visitor]

Knowing healthcare industry is a very complicated and delicate one, I was wondering if anyone has any specific tips (i.e. operations questions to ask during acquisition process) or websites that offer such tips.

06/04/08 @ 01:33

Comment from: Andrew Needleman [Visitor] · http://www.claricode.com

Almost 2 years after this article was written, it may be a good time to revisit these ideas.

Historically, healthcare has been a slow industry to change.

Recently, I've personally seen a significant acceleration of that change.

As the rest of the economy is cooling fast, healthcare investment and innovation is heating up. Of course, in a bad economy a lot of that innovation is on the cost reduction side, such as automated reminder systems and e-prescribing.

However, there are huge opportunities still out there for increasing healthcare quality & reducing costs.

I think that this increased VC & acquisition activity is a confirmation that healthcare in 15 years is going to be much different than it is today.

01/24/09 @ 23:32

Comment from: Roxanne Allaire [Visitor] · http://www.growaprosperousenterprise.com

Whatever the reason for privatization, our current business economy supports wealth creation for privately held companies much more so than for public companies. It's refreshing to see more and more businesses realizing the positive impact privatization can ultimately have on our economic growth. Being a publicly held company is NOT always a pinnacle achievement, but often a clear disadvantage for growth, regardless what they try to teach at MBA school.

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