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Distress and Opportunity: Disruption in healthcare markets

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Exploring the early warning signs of stress and what factors help determine a successful merger and acquisition (M&A) deal in healthcare.

It is no secret that the last couple of years have seen the healthcare market become increasingly disrupted. Amongst other factors, this has been exacerbated by the COVID-19 pandemic as well as the digital boom taking over the industry over the last few years.

With this disruption, healthcare markets have experienced both distress and opportunity. By exploring the early warning signs of stress, and what factors help determine a successful merger and acquisition (M&A) deal, we can create a base-level understanding of how to take advantage of the opportunities arising in this space.

Early warning signs of stress

Organisations have multiple facets of business such as operations, finance, and technology. Generally, there are multiple early warning signs within one of these assets that signal stress or distress. The early signs of stress could impact one, or each, of these areas. Within the healthcare sector, operational performance indicators such as shrinking margins, decreased payer mix, reduced volumes, reduced case mix, or reduced patient loyalty are tell-tale signs.

Additionally, human capital functionality is often a mirror to the internal state of a healthcare organisation. Poor employee engagement, higher than usual attrition rates, increased avoidable errors and increased medical malpractice cases are also indicative early signs of distressed assets. Factors such as increased staff redundancies and compromised quality outcomes exacerbate these symptoms.

Signs of stress can also be observed from a financial lens, with classic indications including declining profitability, tight liquidity, rising levels of overall corporate debt, compromised cash flows and increased debtor days. Market changes such as regulatory pressures, cost pressures and shifts in patient behaviour also play a role in adding to the stress of the situation, yet these elements equally present opportunities if capitalised correctly.

Success factors that determine successful deals

In determining any M&A deal, selecting the right partner and establishing trust is crucial for the success of any transaction. Moreover, having the right capabilities to conduct a robust due diligence process is also key in enabling an in-depth assessment and evaluation of the potential opportunity. M&A’s are one of the biggest corporate transactions a business can undertake, therefore, the due diligence process should ensure decisions are made from an informed perspective.

Within the assessment process, internal factors – such as whether the deal would create a strategic fit to the existing portfolio of assets – should be carefully examined. Assessing the cultural fit is often undermined and can have a critical impact on the success factor of the deal. Similarly, organisational fit and capabilities are crucial to consider.

When reviewing the external factors of a potential deal, the supply and demand economics and the market size need to stack up. Similarly, the regulatory framework needs to be in support of the opportunity at hand. Consumer-led trends should also be considered given the current disruption that has happened in the healthcare environment.

Ensuring a strong change management plan is in place, along with effective and timely execution, are critical factors to support the success of the deal post-transaction. It is essential to determine the degree of integration required based on the acquired asset and the existing asset base to certify economies and value are leveraged appropriately. Lastly, the most important factor in any M&A deal is the potential of value creation. Being able to identify that upfront, or early on post-transaction, will be decisive to the success of the transaction.

Finding the opportunity in a shifting market

As the year moves forward, we will continue to see disruption throughout the healthcare industry not just in the Middle East, but around the world. In such a fast-paced evolving industry, the stresses that result will lead to opportunities for organisations and investors looking for their next good deal. The key to finding success will come down to making sure that any deal that takes place is the right strategic fit and compliments an organisation’s existing profile.

In our ‘new normal’ professionals working in this space have an opportunity to cope with stress and distress by creating new value through deals. It is up to leadership teams – boards, senior executives, and medical leaders alike – to ensure their strategies incapsulate resiliency and long-term growth in a post-pandemic world and to make sure the proper due diligence is done to ensure the success of a M&A deal.

Karim Benhameurlaine.jpg                          Sara Alom Ruiz.jpg

Karim Benhameurlaine                Sara Alom Ruiz

This article appears in the latest issue of Omnia Health Magazine. Read the full issue online today.  

TAGS: Investment
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