Mergers vs Acquisitions – for a healthy business

By Mark Harrison - August 23, 2016

Evolution and disruption within the care sector is leading many businesses to consider mergers or acquisitions.

The care sector is facing significant evolution and disruption from numerous influences resulting in changes that are challenging many businesses in regards to their ongoing strategy. In response to these influences many organisations are choosing to merge or strategically acquire other care businesses. 

The rationale behind this behaviour includes:

  • Markets are rationalising, so organisations participating must become larger;
  • Growth supports capital expenditure through efficiencies of scale that may be due to increasing client demand and/or evolution of delivery methods, or simply seeking efficiencies;
  • Business owners are seeking to move on through generational change or to crystallise wealth;
  • The size of the operation is such that they cannot sustain the underlying business, and;
  • Businesses are needing to be de-risked in order to provide ongoing protection through growth, vertical or horizontal.

Often as organisations grapple with these challenges the focus can be on the need for a transaction rather than the appropriateness of the transaction. Opportunity assessment becomes critical particularly within organisations with limited resources. To this end, it is important that businesses have a clear strategy or plan to critically assess the opportunities that may be presented to them. 

Simplistically, an acquisition plan should answer the question “What will the transaction add to the business”? For example, the purpose may be to:

  • Acquire competitors to reduce competition or increase market position;
  • Acquire supply or distribution channels to improve quality of products;
  • Guarantee supply, or expansion into new markets or product areas to reduce risk. 

All of these are currently motivators for various businesses in residential aged care, in-home care, disability services, primary and allied health. Once the basic criteria is set it provides the basis for target identification and assessment at the most primary level. If targets are identified you can then assess the value of the acquisition or merger. 

Beyond envisioning what a transaction will add to a business strategically, assessment of a merger opportunity is highly complex and subjective. Too often all of an organisation’s energies are put into price/value determination, or the politics associated with bringing together two organisations (who is to be the CEO or chair). But there are other critical assessments that must be undertaken to ensure an opportunity is the right one.

Organisational culture.

If the operating or management style of two organisations is significantly different, the organisations will be challenged and delayed in coming together to operate effectively. Interviewing senior management, reviewing reporting frameworks and internal communications, and obtaining staff engagement surveys are all insights into to the style of management and culture of an organisation. 

People matter.

Leadership assessment and retention will partly fall out of the cultural assessment. Certainly those not needed or desired for the transition should be evident.  Retention of organisational knowledge, particularly when a merger is not simply for growth, but involves bringing in a new aspect of operations, is necessary for risk protection and to maximise the strategic advantages sought. For example, what would an insurer know of operating a dental clinic.  Presumably not a lot, hence the need to retain leadership.  Identifying the key leaders, often not through hierarchy, but by meeting, and understanding their personal purpose will guide you as the robustness of an organisation. Is it too dependent on one or a few highly skilled, motivated or controlling people? Do the key people see and want to be part of your vision and are they willing to commit to make it happen? 

Synergies.

It is important to focus on identifying merger synergies and make a realistic assessment on whether they can be realised and the strategic advantage delivered. Costs savings and synergies are sensitive topics within the Care sector, particularly for the not for profit operators. While culturally they are difficult to deal with, these challenges must be addressed in order to realise the gain of an acquisition and protect the merged organisations from the challenges they were motivated to transact on, such as a change in environment or seeking greater efficiencies. Importantly, do not overestimate the synergies available. All too often an “acquirer’s” faith in their own ability to improve or harness greater efficiency, or market penetration than the current management, is overstated, and inflates the opportunity assessment. Never assume, seek to understand why average consult times may be longer, staff to patient ratios higher, staff utilisation lower, or cost per hour of care higher, before pencilling in an efficiency gain.

Finally, have a merger or acquisition assessment plan that addresses the above, together with traditional financial and legal due diligence issues and stick to it. Due diligence is a critical step for the protection of your interests and provides you with further information and knowledge to assess your proposed strategy to deal with an evolving care sector. 


Contact our experts


Other articles


 

Top of Page


 Back to News




IN THIS SECTION:


Rob Southwell

Sydney

Managing Partner and Partner – Private Clients Group


> View profile

John Brazzale

Melbourne

Partner and National Chairman


> View profile

Michael Minter

Newcastle

Managing Partner


> View profile

Bryan Hughes

Perth

Chairman


> View profile

Tom Verco

Adelaide

Managing Principal


> View profile

Ross Walker

Brisbane

> View profile



Partnership fraud

SUCCESS

Paperwork and independent advice saves partnerships from fraud

Discover more

Kia Ora Horse Stud

CASE STUDY

Pitcher Partners fills a Financial Manager gap to keep the business on track

Discover more

Fuel Injection Company Administration

LEADERSHIP

A fuel injection company began life as an Australian public company before being acquired by a UK publicly listed company while in the research and development stage of a “green...

Discover more



@PitcherPartner We've noticed things are getting a little hairy in the PP offices. We've got gents (and some faux-mo ladies) sporti… https://t.co/XPHEVA3CsW