While entertainment mega-mergers like AT&T/TimeWarner and Disney/Fox are dominating the business news headlines, the implications of tax reform and other policies from the Trump administration are changing the merger landscape for all types of industries. One sector that’s experiencing significant consolidation, a lot of it “under the radar,” is healthcare.
Within the last nine months, there have been two mega deals announced — CVS/Aetna and Cigna/Express Scripts – which are both around $70 billion each. Additionally there was the Humana/Kindred transaction valued at $4.1 billion. While neither of the mega deals have been approved yet (the Humana/Kindred went through in July), this type of activity is indicative of what’s going on in that sector – that is vertical mergers. Vertical mergers are where two companies at different positions in the value chain combine. And we can expect more of these in the future.
“Vertical or ‘transformative’ transactions will…occur with greater frequency in 2018 as the delivery of healthcare is fundamentally changed,” Jeff Swearingen, co-founder and managing director of Edgemont Capital Partners, said in a February 2018 interview. “The historical lines between insurer and provider will continue to blur.”
According to Moody’s, this trend will deliver significant long-term benefits to both parties, although they may result in some short-term financial challenges.
In an April 2018 report the credit ratings agency wrote, ”In the long term, such vertical integration holds the potential for cost reductions, improvements in coordination of care, and increased non-regulated cash flow…However, in the short term, the large deals are credit negative…with significant execution risk.”
Those implications don’t seem to be slowing down interest in this sector. As Edgemont Capital’s Swearingen notes, “Barring some major reversal in the U.S. government’s healthcare policy, we are in the very early stages of massive consolidation and change.”
In addition to vertical mergers, the healthcare industry is also seeing a very robust horizontal merger market. According to PwC, 2Q2018 saw 255 deals announced, a 9.4 percent increase over the same time period in 2017.
And then there’s Amazon. While it’s not certain what shape the online retail giant will take when it comes to healthcare, they started to show their hand when they reportedly paid just under $1 billion to acquire online pharmacy PillPack. This came just six months after they announced the formation of the new healthcare venture alongside Berkshire Hathaway and JPMorgan Chase.
With each of these mergers or acquisitions comes the need for a safe and secure environment in which to conduct due diligence. Traditional data rooms have proven cumbersome, inefficient and not in keeping with today’s technology. This is why many are choosing to use virtual data rooms like SmartRoom to manage these processes. They offer services like real-time content management and workflow resources to streamline due diligence. They securely house key documents like financial data, contracts and employee information, all of which can be critical in evaluating a potential M&A deal.