With 2015 being a year of unprecedented merger and acquisition (M&A) activity in healthcare, Healthcare Informatics Editor-in-Chief Mark Hagland sat down to speak with Michelle Mattson-Hamilton and Ben Rooks of ST Advisors, a strategic and financial advisory firm focused on the healthcare IT industry. Michelle Mattson-Hamilton spent three years in corporate strategy in the telecommunications industry before making the move to healthcare IT and joining ST Advisors five years ago; Ben Rooks, before founding ST Advisors in 2009, spent 15 years on Wall Street as both an equity research analyst and investment banker focusing on healthcare IT.
Mattson-Hamilton and Rooks coauthored an analysis of 2015’s M&A activity in healthcare IT, published on Tuesday for Healthcare Informatics. Hagland spoke with the analysts regarding the analysis contained in their report. Below are excerpts from that interview.
In your analysis that we published yesterday online, you noted that 2015 was a high-water-mark year for mergers and acquisitions, but that you see M&A activity softening or weakening in 2016. Tell me about that.
Michelle Mattson-Hamilton: So, 2015 really was a landmark year. I actually just read something that said it was a high-water-mark year in many markets, not just healthcare. And it’s not just in terms of the number of acquisitions, the highest number of acquisitions since 2007, but the amount of private equity investment involved, it was really a landmark year.
Why do you think that things peaked in 2015?
Ben Rooks: Part of it could honestly just be regression to the mean, in this instance. Though a lot of smaller companies had been funded that don’t necessarily have long-term sustainability, and the investors in those companies will be looking to the M&A markets to rescue them. And it would be an interesting exercise to go back to a rolling five-year, historical analysis of M&A activities—when an M&A company acquires a company, the typical length for holding it is about five-and-a-half years. So you could go back and see who traded in 2011 or 2012, and figure out who might be thinking about an exit in 2016 or 2017.
Understood. Meanwhile, what do you see happening this year?
Mattson-Hamilton: In the first couple of months of 2016, there have been quite a few transactions, but the investor perspective has bene more cautious. That’s because there was so much aggressive activity in 2015, and people were paying very aggressive multiples for acquisitions. But now that the capital markets are starting to show restraint, that’s starting to pop over into the healthcare IT market. And given that last year was such a high-valuation year, things are coming back down now.
Rooks: In some cases, crazy-value was involved. I’ll say openly that I think the prices IBM has been paying, for Truven, Merge, all of the companies they’ve acquired—have been crazy. Sometimes, in other instances, I would describe the valuations as being in the “aggressive-value” category.
Mattson-Hamilton: And aggressive valuation or over-valuation is problematic, because it feeds on itself. You have a couple of aggressive valuations, and then those over-valued companies believe in their monetary value, and it builds. So it just got way out of control with Merge and Phytel, etc.
Meanwhile, you noted that most mergers and acquisitions last year reflected alignment or realignment around broad policy and industry trends, especially the shift away from volume in healthcare provider reimbursement and towards value. Let’s drill down a bit on that. So this activity broadly reflected the broad policy trends of U.S. healthcare?
Mattson-Hamilton: Yes. Companies are setting themselves up to be effective long-term. There weren’t a lot of transformational deals; instead, these companies were setting themselves up to be more effective in the future. And depending on where the main company sat in its sub-vertical, they weren’t changing anything radical 180 degrees.
Rooks: And there were many what I would call “tuck-in acquisitions,” last year.
Mattson-Hamilton: Some were a bit more than tuck-in acquisitions, but we didn’t see a lot of transformational acquisitions.
Did most of the mergers and acquisitions you’ve written about in the article make good conceptual and business sense to you?
Rooks: I think they did. I think a lot of them were good, thoughtful actions. Cerner-Siemens, as I shared it with you, for example, made a lot of sense.
Mattson-Hamilton: Or, for example, athenahealth’s acquisition of RazorInsights and WebOMR: those made sense, because they helped Athena move into the inpatient market.