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Consolidation Expected to Increase for Hospitals, IT Companies

July 1, 2014
by John DeGaspari
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Report predicts spike in deal activity following decline in 2013

Hospitals and healthcare providers, as well as healthcare IT companies, are the subsectors most likely to see increased consolidation in 2014-2015, according to a report published by the Nashville, Tenn-based law firm Bass, Berry & Sims PLC.

Published in association with Mergermarket, the “Healthcare & Life Sciences M&A Outlook” cites capital needs and economies of scale as the two major drivers for consolidation among hospitals and providers. 

Deal activity took a downward turn in 2013, dropping to 385 deals worth $97 billion from 459 deals worth $124 billion in 2012, according to Mergermarket data. “Last year’s decline was due to uncertainty around implementation of the ACA—much of which has been clarified,” according to Leigh Walton, a member of the firm and healthcare transactions attorney member of the firm’s healthcare and corporate practices, in a prepared statement. “We now have a clearer picture of how the law will affect healthcare organizations.

Overall, 86 percent of respondents expect M&A activity to increase in healthcare and life sciences. Specifically, respondents point to these top strategic drivers:

  • Increased demand for facility and equipment improvement—46 percent;
  • Need for IT support/capabilities—42 percent; and
  • Rising compliance costs—42 percent.

Respondents identify the need for IT support capabilities as the major driver for M&A in the near term—particularly Stage 2 meaningful use implementation involving the use of technology in advanced clinical processes, such as requirements that relate to electronic processing. Another factor that is expected to drive M&A activity is increased compliance costs; for example, the rising use of electronic health records has required companies to overhaul their record-keeping processes while striving to maintain patient privacy. 

Respondents believe private equity will be most interested in the hospital and biotechnology/pharmaceutical sectors, with 42 percent of respondents choosing each as their top choice.

The report was based on interviews with 50 corporate and private equity respondents in the healthcare and life sciences sectors.

 

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