Massive deals among top factors driving healthcare M&A activity

Strong earnings, megadeals and promising demographics are helping drive healthcare M&A activity, according to a recent report from consulting firm West Monroe Partners and Mergermarket.

More healthcare providers are churning out higher profits and buyers are taking notice. In 2017, 579 deals were made for U.S. healthcare targets, according to the report, marking the second-highest total on record.

Over the next three years, 32 percent of survey respondents agree attractive margins will continue to be a top factor in attracting potential buyers. The strong demographics for the aging population (23 percent) and the overall growth in demand for care (23 percent) were also found to be top factors.

The report analyzed survey responses from 100 market practitioners on the drivers and challenges for healthcare acquirers.

Megadeals with vertical integration goals—such as Humana’s acquisitions of Kindred and Curo and CVS Health’s $69 billion buy of Aetna—are also promising higher revenues in the long run. Among survey respondents, 41 percent cited revenue or profit growth as the most important operational metric driving M&A strategies.  

Along with rising interest in the healthcare space, competition has also heated up, resulting in fewer available high-quality assets. Still, 11 percent stated overall competition for assets make healthcare targets more attractive over the next three years.

These market challenges are giving rise to alternative deal models, including joint ventures and partnerships. More than three-quarters of respondents said they would either definitely or likely pursue partnerships, alliances and joint ventures in the next 12 to 18 months instead of straightforward acquisitions.

The alternatives can help buyers realize value sooner, while avoiding tough integration challenges and potentially accessing new technology or expertise.