Merger and Acquisition Market Still Sizzling Despite Credit Crunch, Expert Says
The current credit crunch hasn’t diminished the interest in merger and acquisition activity in the healthcare information technology marketplace. In fact, interest is picking up, according to Jim Brennan, CEO of VirtualCDO of Great River, NY.
Brennan’s company advises small- to medium-sized healthcare and healthcare technology companies on corporate growth, governance, and mergers and acquisitions, providing part-time assistance to companies that don’t need a full-time corporate development officer.
Credit isn’t all that important, he says, because potential acquirers are bringing cash to the table instead of requiring complex financing.
“Most of my clients are small and buyers don’t need credit facilities of half a billion,” Brennan tells Inside Healthcare Computing. “In fact, more and more are cash deals without required earn-outs. CFOs of the buyers are putting more effort toward transactions that don’t require liabilities, credit facilities, or loans that would put them in harm’s way to have to go to the capital market.”
Activity Will Continue, But With Smaller Deals
Brennan expects the drivers this year to be similar to those of 2007, but with smaller deals. “In 2007, we saw a record number of deals as I predicted, but deal volume per transaction dropped. More of the big guys have been bought and sold and the balance of available companies is smaller.”
Hot healthcare sectors in 2008 will be those related to ambulatory and outpatient services such as diagnostic labs, respiratory, hospice, home health, and remote care, all of which Brennan predicts will see further consolidation.
In healthcare IT, Brennan says that generic software and medical device companies look unattractive, but that’s because healthcare equities analysts often lump technology in with pharma and medical device companies. Deals will happen nonetheless, he vows. “We’ll see more software deals for sure. The bigger guys will continue to acquire technology for feature sets they don’t have.”
He predicts some activity involving companies selling systems for staff optimization, scheduling, time and attendance, and workforce management. Revenue cycle management and financial dashboard products will be attractive acquisition targets, Brennan speculates, as will outsourcing providers.
Capital Gains Tax Uncertainty, Weak Dollar Will Spur Company Sales
Tax fears may push company owners to sell out in 2008. “Capital gains on transactions from a business sold are taxed at 15 percent, not as ordinary income at 40 percent,” Brennan explains. “Companies are thinking, ‘If an acquisition happens next year, will I be able to take advantage of the low capital gains rate?’ It could depend on who’s in office. I’ve heard that companies are looking to deal this year while capital gains are still low.”
The weak US dollar could also make US companies attractive to foreign investors. In fact, Brennan is currently working with two overseas investors who want to buy into the US healthcare IT market. One is already involved in that market overseas, while the other is seeking a purely financial investment. However, foreign parties may have to compete with US companies, who find domestic acquisitions more attractive for the same reason.
Microsoft, Google, athenahealth Scare Competitors, Drive Deals
The ongoing war between Microsoft and Google has spilled over into healthcare and will change the M&A climate, Brennan says. “It creates a lot of work for guys like me. The more they get in, the more consolidation that will occur. Buying Azyxxi sent shivers up the spine of vendor CEOs concerned about how a big monopoly will get interested in their space.”
The business model of athenahealth will also worry competitors, Brennan believes, because quick changes to its billing rules engine are instantly made available to all customers. “I love the model that these guys have. It’s nothing unique, but they’re just executing on it. CEOs want and dream about it, but athena is doing it. Now that they’ve got attention, they’re starting to gobble things up, like clinicals. It’s a great rollup strategy. The old client-server model works to some degree, but to promote anything as real-time and regulatory compliant, it has to be real-time, not tomorrow. The client has access to every piece of intelligence.”
Companies May Cut Back, Hospitals May Not Find Cheap Bond Debt
Brennan says the HIMSS annual conference is always a target for mergers and acquisitions, with parties trying to get their deals finished by then to make the big announcement. He has heard, however, that companies may be cutting back on marketing and possibly even rethinking the extent of their involvement with the conference starting in 2009.
Perhaps the biggest threat to vendors is the financial health of their hospital customers, which is often driven by the availability of bond-backed credit. “Bond ratings are purely based on the credit market,” Brennan says. “If somebody has built a financial model for building a new tower that assumed the credit market would be stable, they’re in trouble right about now.”
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