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Part One: Seven Pitfalls to Avoid in a M&A

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Blog January 20, 2017 by Jonathan Faria
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Part One: Seven Pitfalls to Avoid in a M&A

While mergers and acquisitions (M&A) transactions are normally announced with great excitement, optimism and high expectations, the stark fact is that the vast majority of them fail to deliver the projected benefits and do not sustain or bolster shareholder value. In fact, according to the Harvard Business Review, study after study puts the general failure rate of M&As somewhere between 50 percent and 80 percent.

The most common areas of failure is in assessing the deal, stakeholder communication and establishing expectations, and integration post-deal. Here are seven M&A Healthcare common pitfalls to avoid:

Pitfall #1 Focus on the Deal-Breakers

It is critical to search for deal-breakers, those hidden risks that are likely to impact your deal decision making, and valuation. There is a balance to be struck between conducting the appropriate amount of due diligence but not dwelling on the minuet details that you lose out to competitors with a higher tolerance for risk, or better evaluation process. Focus on areas that have the greatest impact with deal value being your touchstone. The traditional approach to due diligence centers around financial and tax impact assessments. However, operational due diligence – areas such as supply chain, IT and technology, physician groups integration, and people and culture – are also important, especially for organizations with a large footprint. Many view these operational issues as details that will work themselves out after deal announcement. While this is sometimes true, too often these details represent the difference between succeeding in achieving targeted results after a deal closes.

Pitfall #2 Patient Benefits

Organizations always embellish the benefits patients will receive from a planned merger. All too often, customer service is put on the back burner as merging organizations wrestle with operational issues that seem more urgent. It’s no surprise that patient experience can suffer as part of a merger integration. Some ideas to consider to avoid these customer experience pitfalls:

  • Put patients at the center of your integration planning. Rationalize services and processes around customer requirements, not internal considerations.
  • Use analytics to identify critical patient segments and develop distinct migration support levels and communications.
  • Communication, communication, communication – talk to customers early and often, even if you don’t have all the answers. Use online surveys, focus groups, suggestion boxes, and more—whatever it takes to stay connected and informed.
  • Minimize operational changes and focus on activities that will ensure your customers a smooth transition from day one. After the transitional period, you can make all of the improvements you want.

Pitfall #3 “Merger of Equals”

According to Forbes, the term “merger of equals” is “financial and legal framework that enables companies to combine with no designated acquirer. Both companies are made equal as far as the technicalities of the deal are concerned. To give form to this equality, the board of directors of the combined company is split equally between directors from each company. There is also typically a brokered power-sharing arrangement among the chief executives, both wanting to be perceived as winners. The shareholders from each company retain ownership in the combined entity, since the deal is structured as a stock-for-stock tax-free exchange.”

Merger Integration highlights “the phrase gets misinterpreted. Employees decode it to mean that both companies will be treated as equals so far as integration decisions are concerned. What’s worse, executives often misuse the term in attempting to assure people that neither company will dominate the other. Even if that’s the political intent of top management, it’s an impossible dream. Power is never perfectly balanced, so one of the two companies invariably will be a “little more equal” than the other.” Forbes also indicates that mergers of equals “account for a disproportionate share of disastrous failures” due to the ambiguity and internal politics that allows for more culture clashes and internal competition.

Pitfall #4 Validate Integration Assumptions Early

Deal making is hard, but integration is often much harder. That’s because integration covers a huge range of areas: service lines, patient experience, compensation, shared services teams, performance measurement, IT systems, facilities, branding, and more. With healthcare mergers, the real restructuring comes about through a series of micro mergers, the incremental melding of departments and programs within merged hospitals that happens after the formal amalgamation is made official. After the legal work is done, negotiations must begin to unite one by one, everything from clinical programs to laboratories, food services and laundries.

To increase your chances of achieving desired results, make integration assessment a standard part of due diligence. Include key clinical groups, HR and brand assessment earlier in the M&A process , due diligence stage, rather than waiting until integration planning. Build integration risk into your financial model. What will happen if your expected benefits fall short by 30 percent or take 6 to 12 months longer to achieve?

Before closing a deal, have your integration team assess the due diligence estimates and commit to the costs and savings. When the deal closes, make sure everyone accountable understands exactly where the benefits are supposed to come from and how to deliver and track those benefits. While all of this might sound obvious, estimates of benefits are often intentionally withheld from integration teams to force them to come up with their own “unbiased” estimates. This can often be a recipe for disaster and waste valuable time.

Check back next month for Part 2 of this blog, where we focus on the pitfalls senior leadership fall into when communicating or minimizing the challenges that the merger faces from an employee communication and cultural integration standpoint.

Which of these pitfalls has your healthcare organization fallen victim to? Which are you prepared to overcome? Let us know in the comments below and subscribe to receive the latest Shikatani Lacroix insights in your inbox.

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