The coronavirus has had a significant impact on healthcare companies, the healthcare industry, and healthcare mergers and acquisitions in the United States and abroad. Despite the impact, the main drivers of 2019 continue to fuel consolidation and plan to do so in 2021, including low cost of capital and accessible debt markets, large balance sheets, availability of dry powder and pressures. on costs. A major new driver involves an acceleration of liquidity events by baby boomers, who still constitute the largest population of business owners and have lived through the dot-com bubble, the Great Recession of 2007-09 and now COVID-19.
The healthcare space remains ripe for consolidation, with many companies owned by highly fragmented founders presenting a significant opportunity for consolidation and reducing costs and scale. Before the pandemic, financial sponsors were sitting on a lot of dry powder with significant capital to deploy. COVID-19 hasn’t changed that. However, there has been a shift in the sub-sectors and towards quality assets. Although the market saw a slowdown in hospital and physician-office management agreements towards the end of 2019, COVID-19 accelerated the slowdown given the postponement of elective procedures and wellness visits. COVID-19 has also had an impact on the post-acute market as the census has dropped in the nursing home industry. With the shift to home care, the market is seeing greater consolidation among home care providers, such as pharmaceuticals, home care and hospices; direct consumer and remote care providers; as well as IT and digital health service providers supporting these healthcare platforms.
Enterprise values and EBITDA multiples appear to remain constant for quality assets despite COVID-19, and there appears to be significant competition among buyers for these assets. Put simply, sellers of quality assets are not willing to take a discount, and it seems financial sponsors and strategists are comfortable taking these risks since these companies remain structurally sound. Given the acceleration of a sell-side liquidity event, strong competition for buy-side quality assets and future headwinds, including COVID-19, and the potential for tax and drug price reform, buyers must now act with agility and speed, because currently seen in the market.
Towards the end of 2019, we expected transaction activity to remain constant throughout 2020, but many transactions were put on hold or abandoned during the peak of COVID-19. The past year clearly did not live up to our expectations, but the healthcare M&A market is showing significant signs of optimism. The market is clearly rebounding in certain sub-sectors, especially for quality assets. COVID-19 has accelerated the shift of care to the home and non-institutional settings, with mergers and acquisitions activity flourishing in these areas.
Negotiators have also accepted that COVID-19 is here to stay, and they need to manage and mitigate the risks. Rather than shutting down trading activity altogether, financial sponsors and strategists have determined ways to structure deals and create value with wise investments. We expect this approach to continue to support healthcare M&A activity in 2021.
This article was published in the Winter 2021 issue of Middle Market Growth, the official publication of the Association for Corporate Growth (ACG), which includes a bimonthly print magazine, website and weekly e-newsletter. It is reproduced here with permission.