Separating Financial, Strategic, and Synergistic Buyers
In a healthcare market that is saturated with buyers acquiring new centers and businesses on a regular basis, it is important, as a potential seller, to step back and take a look at some of the differences between financial, synergistic and strategic buyers in the market.
Steve Masler, senior partner at Masler and Associates says there are some differences in the length of plans with the different buyers.
Masler says a financial buyer is one that has financial considerations in mind. A financial buyer would expect to get a very attractive return from their investment once they have brought it up to a financially successful standard.
A strategic buyer, on the other hand, also might like to get a financial benefit, but that’s more incidental to their main purpose. A strategic buyer’s main purpose will have something to do with their fundamental business and their business objectives.
“Usually, a strategic buyer is in the investment for the long-term. Not that the financial buyer could not be in to the long-term, but usually they have an exit strategy in mind that is in a shorter time horizon than a strategic buyer,” Masler says.
“A hospital would typically be a strategic buyer. They could have financial objectives, but they are probably one of the more common types of strategic buyers because hospitals usually have a comprehensive system and urgent cares could easily fit within that system.”
William J. Spratt Jr., partner with the law firm Akerman says that a synergistic buyer may be considered a subset of a strategic buyer. They look to acquire companies in the same or a related industry to support and enhance the synergistic buyer’s existing business line.
Spratt says a strategic buyer also acquires businesses in the same or similar business to expand its platform and create economies of scale. But a strategic buyer is more likely to purchase a company in the same business, whereas a synergistic buyer may look to a complimentary target to support its vertical integration objectives or a company in an unrelated business.
Patrick J. Hurd, partner with LeClair Ryan views a synergistic buyer as an entity already established in or complementary to the healthcare industry sector of the target seller.
“A primary purpose of such a synergistic acquisition is to gain economies of scale or to increase growth at a rate or in a direction otherwise unavailable by internal existing company growth. The primary strategic focus of such a buyer is how the seller’s entity will enhance existing operations, either short-term or long term. Such a buyer may pay a premium for the seller’s operation with a view to creating growth from yet unrealized (speculative) synergies,” Hurd says.
“Another type of strategic buyer, is the financial buyer. While such a buyer may currently occupy a niche in the healthcare sector of the target seller, it may also be a venture capital firm or investment management entity looking for a good return. Such acquisitions are typically highly leveraged and focus on the target’s cash flow and a specific ROI. For example, there were several Health IT acquisitions in 2016 by investment capital firms or IT companies with small but promising platforms needing the technology or creative talent of the target seller but lacking the internal capital to acquire such entities.”
On the further differences between the two types of buyers, Spratt adds that a synergistic buyer may buy a company in an unrelated business to better support its organization. For example, a health care company may acquire an information technology company to support its business.
Hurd believes both types of buyers may be focused on strategic acquisitions but the synergistic-strategic buyer intends to remain in the healthcare industry sector long term while the financial buyer focuses on short-term gain (albeit from some immediate synergies in some cases) with a view to spinning of the company or selling it to a synergistic buyer down the road. I prefer to use “strategic buyer” and “financial buyer” rather than “synergistic” versus “strategic.”
When discussing where these types of buyers tend to focus their sights, Hurd says that although strategic investors still dominate the Urgent Care sector, private equity investment caught on in 2014-2015. By linking Occupational Medicine and Urgent Care, some financial buyers are looking to the growth in employer self-funded health insurance and employee wellness programs.
“Others see benefits from ortho-specific urgent care and then combining such focused services with the occupational health market as well. Of course, whether that trend continues depends upon what changes in the healthcare marketplace occur because of the Presidential election,” Hurd says.
“The 2017 CMS site-neutral reimbursement rules will have an impact on ASCs. I believe hospitals with a sound outpatient surgery infrastructure will avoid acquiring ASCs given the reduced reimbursement rate. However, there may be some strategic buyers with poor outpatient surgery infrastructure looking to benefit from rural-based and value-based reimbursement models. Financial buyers may pursue free-standing ASCs, especially those with robust scheduling/IT/Staffing infrastructure already performing well under the reduced reimbursement rates for such free-standing entities.”
According to Hurd, given the continued downward spiral in reimbursement rates for various outpatient radiological services in general and interventional radiology in particular, he does not foresee a lot of growth in IDTF acquisitions by financial buyers, although savvy strategic buyers with excellent PACS/HIT infrastructure may find some bargains.
Hurd explains there has been an uptick in financial buyers in the behavioral health sector and he believes that may continue (again predicated on what happens in a Trump Administration). There are a number of large behavioral health entities that have been active in expanding geographically as well as moving into psychiatric telemedicine, for example.
As far as the most prevalent buyers in the current economy, Spratt has his opinions on strategic buyers.
“Strategics acquiring competitors to consolidate is likely more prevalent. But strategics looking to vertically integrate into more robust systems favors a synergistic approach. And as consolidation opportunities become more limited, companies with capital to invest are likely to look to enhance their systems through synergistic acquisitions,” Spratt says.
Hurd believes the synergistic-strategic buyer remains more prevalent than the financial buyer primarily because of the wide variability and gross uncertainties of providing healthcare services.
“Given the potential for substantial changes in the Affordable Care Act, Medicare and Medicaid in 2017-2018, both synergistic-strategic and financial buyers better to their homework before pursuing acquisitions in what is sure to become an even more uncertain healthcare marketplace,” Hurd says.
When discussing which type of buyer is more apt to close a deal successfully, Spratt says one is not necessarily more successful than the other.
“But since both are often strategic buyers, familiarity with the business of the target will favor a closing over a synergistic transaction. The farther afield the target is to the buyer, diligence may take longer and there may be a learning curve in getting the transaction to close,” Spratt says.
“Familiarity with the business of the target may expedite closing.”
Hurd says strategic/synergistic buyers are more likely to “close the deal” so long as there are no significant hurdles from a market consolidation standpoint (e.g., FTC scrutiny).
“Despite the pressure to improve the bottom line, such buyers tend to be more willing to accept a certain amount of speculative synergies and the concomitant delays in ROI. The financial buyer is more likely to require significant, drawn out due diligence and balk at the first sign of poor financial performance or low economic forecasts,” Hurd says.
So which type of buyer is most beneficial in the long-run or short-run for a buyer? Hurd says he gives the lawyer’s answer to this question.
“It depends. The infusion of private equity may provide an immediate boost and relieve the pressure to jettison personnel in the short-term, versus a synergistic buyer needing to eliminate redundant personnel/services to better focus on achieving the desired synergies. However, the financial buyer is more apt to spin off the acquisition to improve ROI or to dump under performing sectors,” Hurd says.
“The key is to define the growth strategy in concrete terms with a time-frame for achieving the identified goals and to avoid overpaying for the acquisition. Too often synergistic buyers fail to define properly the “fit” of the acquired entity in the overall growth strategy of the organization thus failing o achieve the synergies that underpinned the need for the deal in the first place.”
If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.