NEWTOWN, PA – Mergers and acquisitions (M&A) veteran Jonathan Sadock recently described 2021 M&A activity as “unexpectedly strong,” even “incredible” for the healthcare sector. Despite the positive reviews, the transactions did not come easily in a “frothy” market.
“The mechanics of getting transactions closed required a lot of steps that are made more difficult when you’re trying to do them remotely,” says Sadock, managing partner/CEO, Paragon Ventures LLC, Newtown, Pa. “For some of the larger acquirers in market, it was a challenge getting third party vendors (independent accounting firms) to complete quality-of-earnings assessments on target companies. There was such demand that some buyers had difficulty finding someone to help with those assessments. As a result, some pivoted to doing it themselves instead of contracting with outside vendors.”
Medtrade Monday sat down with Sadock to discuss the recently-completed year and the M&A climate for 2022. The following is part one of the conversation, with part two coming next week.
Medtrade Monday: What were the factors that contributed to the M&A climate of 2021?
Sadock: I can whittle it down to five factors. Number one is a healthcare focused M&A market. There was a worldwide focus on the health and well-being of humanity through the pandemic. That brought an equal focus on the companies—the heroes of the pandemic. Number two is performance. Buyers and investors recognized the strong performance within key sectors of healthcare. Number three is what we call capital or dry powder. The availability of capital for acquisitions and investments was at an all-time high in 2021.
Number four is interest rates. Interest rates were the lowest in U.S. history. Buyers and investors had the ability to target better, stronger, and larger companies—and they did. Number five is capital gains taxes. Concerns over increasing capital gains rates became a motivator in 2021 to get ahead of what are projected to be increasing capital gains rates, although right now it looks like we are not going to have as significant a capital gains rate increases as what we feared.
Medtrade Monday: Why was there so much available “dry powder”?
Sadock: Corporate and private equity performance leading up to the pandemic generated profits and cash that they could deploy into acquisitions. In addition to that, with a significant pullback in 2020 coupled with stimulus funding, further supported more and larger acquisitions. For some organizations, the strategic deployment of this capital is the part of their mission and healthcare companies represent outstanding investment opportunities.
Medtrade Monday: What surprised you in 2021?
Sadock: The scope and breadth of both corporate buyers and private equity buyers. In some cases, buyers and investors vigorously competed to acquire prime opportunities.
Medtrade Monday: How do you determine if something is a prime opportunity?
Sadock: Currently the prime opportunities are defined as those businesses with consistent revenue growth and profitability in the years leading up to 2020 and continuing through the pandemic. Strong leadership teams, regulatory compliant operations, and business plans that are sensible, defensible, and targeted within their business model—all of those contribute.
It is also interesting to note that the vertical integrations which were so popular over the past decade have expanded to include horizonal channels such as: insurance companies integrating care platforms; manufacturers blurring the lines of demarcation by adding direct sales channels; and focus on consolidating sales efforts across the continuum of care. The entry of major distribution and technology disrupters i.e. Amazon, Walmart and strategic growth companies i.e. Teladoc, CVS, United Healthcare have added to the current acquisition appetite across the continuum of care.
Medtrade Monday: What advice would you give to potential sellers?
Sadock: I know this is going to sound self-serving, but I really mean it in the most genuine way I can; Don’t go it alone. Buyers today are sophisticated. They have to be, especially when dealing with regulatory issues and financial reporting requirements. The process of selling your company can be arduous and time consuming. It can also be an unwanted distraction from the very efforts that made your company valuable to begin with.
Hiring an experienced team of advisors, lawyers, and accountants working in tandem will always deliver greater value than their related costs. Many buyers prefer when a business is represented in a transaction, because we have the experience of anticipating hurdles and we get the parties to a closing table. Don’t go into the market prematurely and fail, because that can be very expensive—not just to the transaction but to your ongoing operations. Be a good scout and get prepared.
Medtrade Monday: How wary should providers be of unsolicited offers?
Sadock: Beware of unsolicited and uninformed offers. Over the last 35 years in healthcare, I have never seen so many newbies interested in laying stakes in healthcare. You need to make certain that any offer comes from an entity able and ready to consummate the transaction.
Make sure any buyer/investor has done their homework before they made you an offer. Time is valuable and a failed LOI can be expensive. If you have never sold a healthcare company before, an unsolicited offer may seem enticing. However. an offer does not guarantee you are receiving the strongest valuation, preferential transaction structure, or surety to close. Tread carefully because you only get to sell the business once.
Next week, Sadock will cover predictions for 2022.