The past year saw some major merger activity in the health insurance market. That trend is expected continue in 2016. According to a KPMG survey of 553 executives and M&A professionals, healthcare is projected to be the third busiest sector for M&A activity in 2016, behind technology and pharma/biotech.
When it comes to factors driving M&A, first is growing customer base and second is expanding geographic reach, said Bill Baker, who leads KPMG’s Healthcare and Life Sciences Deal Advisory practice. With the current regulatory landscape, payers “have to operate at a more cost-effective level and you just need scale to do that,” he added.
But just as in real life, finding the ideal partner and getting from courtship to the altar can be fraught with pitfalls. Among payers and providers, cultural and human resource issues are cited as creating the biggest challenges in acquisitions, followed closely by sales and marketing transformation, Baker said.
So how can firms improve their chances for a successful outcome? Torrey McClary, a partner in Hogan Lovells Los Angeles office who represents providers in M&A transactions, offers 10 tips on best practices for negotiating a successful deal.
1. Identify your goals in pursuing the merger or acquisition.
“Its surprising how far down the road people can get without knowing exactly what they want to accomplish, McClary said. “Being able to see the fundamental rationale and purpose for whatever you’re doing and having that guide everything going forward is important.”
2. Know which stakeholders are likely to have an interest in the transaction.
After identifying which employees, regulators, affected communities have a stake in the transaction, develop a plan of communication to interact with those parties and get buy-in from them.
3. Evaluate potential legal constraints, such as antitrust issues and government approvals.
Being aware of the legal landscape and identifying early on the steps that will need to be taken can “make or break” a deal, McClary said.
4. Engage counsel early.
While both parties in an M&A transaction will need to share information during the negotiation process, sharing information inappropriately and too early could have antitrust implications, and lawyers can help to ensure the firm stays in compliance with the law, McClary said. The attorneys can also help frame the terms and goals of the deal in a detailed letter of intent and structure communications going forward.
5. Be prepared.
Lack of preparation is one of the biggest pitfalls McClary sees during M&A negotiations. Be sure to identify all the issues in advance that are going to be discussed and negotiated, she said.
6. Be sure the negotiating team is unified when it meets the opposing party.
Creativity and surprises have no place in negotiations, McClary stressed. “Everybody should know what the nonstarters are and what a reasonable compromise would be, and that takes planning and preparation and coordination.”
Lack of communication among members of the negotiating team can also lead to confusion about the firm’s intentions and weakens their position at the negotiating table, McClary warned. Be sure whenever the team speaks “it is with one voice and any one-offs are very well-managed, so that you’re not splintered and giving inaccurate information,” she said.
7. Designate a decision maker on the team.
Knowing who makes the decisions and the process for making decisions can help to avoid unnecessary disruptions in the negotiation process and the fraying of trust between the negotiating teams, according to McClary.
8. Bring lawyers into the negotiating room.
Surprisingly, companies don’t always do this, McClary said. “They think they have a wonderful conversation, solve all their problems, and then each [party] goes back to their counsel to draw it up with a completely different view as to what they decided and agreed on,” she said.
9. Be willing to compromise.
If the negotiations hit a roadblock, acknowledge the inability to reach agreement on a specific issue and look for creative ways to bridge the gap, McClary suggests. “Given how complex a lot of these transactions are and the regulatory issues involved, you could almost never get it done without cooperation with your partner,” she said.
KPMG’s Baker agrees. “Sometimes there are other aspects in terms of taking care of employees, the structuring of transactions … that can make the price not just in and of itself be the most important factor,” he said. “And so the bidders are trying to evaluate what are those less costly effects of a transaction that are important to the seller and trying to work through those to their advantage rather than laying more money on the table.”
At the same time, McClary cautions her clients not give in to manufactured pressures, such as time pressures or third-party interests designed to force concessions. When that happens, firms need to step back and take a hard look at their bottomline and then formulate a workable plan for moving the negotiations forward.
10. Document everything.
Before leaving the negotiation, have a process whereby both parties sign off on the negotiated terms, McClary advises. The last thing firms want is to have to go back in and renegotiate terms they thought had already been agreed to. Documenting the session will help to ensure everybody is on the same page about the structure and terms of the deal and help to ensure a stronger working relationship following the transaction.