COVID-19 Short-term Impact on Healthcare* M&A Buyer Mindset

*Home Health, Home Care and Hospice and Behavioral Health

In response to questions from the media, buyers, and sellers, Mertz Taggart undertook a qualitative survey of industry buyers. There has been a wealth of conjecture and prognostication about the short- and long-term effects of the COVID-19 outbreak on healthcare in general and mergers and acquisitions in particular. Rather than guessing, we decided to talk to the people in the trenches, so to speak. The commentary assembled in this overview represents not only first-hand experience with COVID-19’s impact on our industry, but also some excellent insights into what is to come.

As always, Mertz Taggart will do its best to keep a finger on the pulse of the market. Our plan is to share as much good information as possible with the community as we process it. In our small way, Mertz Taggart is trying to contribute to the available information to keep our friends and business partners informed as much as possible.

Overview

Perceived impacts of COVID-19 on healthcare M&A buyers indicate the following:

  • Strategic buyers (both public companies, and mature PE-backed portfolio companies) buoyed by strong balance sheets, dedicated development teams and industry savvy, will continue to do strategic transactions, albeit at a slower pace;
  • Private equity interest in new opportunities is mixed, depending on the COVID-19 impact on other portfolio companies and their banking relationships.

Methodology

On March 19-20, 2020, Mertz Taggart conducted a brief qualitative survey of 24 industry leaders representing home care and behavioral health strategic buyers and private equity groups.

Timeline for current deals

The majority of respondents believe they will experience a slowdown in current closings.  Reasons include market uncertainty, tightening credit and a diversion to other corporate interests.

  • “Although the M&A team is all systems go, the executive team and operations team have other pressing issues to deal with right now.” (Home health, home care and hospice company)
  • “The banks are still lending. They are going to get more stringent and are adjusting their coverage ratios.  It will be difficult for banks to lend into a declining business.” (Private equity group)

Several respondents believe the pace of their current closings will stay the same with one private equity respondent citing “the momentum we have built over the past several months” as reason for optimism.

A couple respondents think their current closings will accelerate.

  • “Opportunistic strategy” (Home care company)
  • “Going to try to accelerate closing on existing opportunities…” (Behavioral health company)

The impact of COVID-19 on the pace of current closings led one respondent to be unsure of how the timeline would be affected.

  • “Uncertainty in the current state of the virus is causing a lot of panic with sellers/buyers from the legislative and operational strain and it is still so early on.  Unknown impacts on the economy could cause drastic changes in the sector and spark sellers decisions to de-list because they are afraid of lower valuations.  However, smaller agencies without less financial cushion may seek to sell to solidify some profit before folding.” (Home care company)

Likelihood to look at new opportunities

The majority of respondents believe their likelihood to look at new opportunities will stay the same.

  • “We are in it for the long game and will continue to look at opportunities.” (Home care company)
  • “We’re PE, we look at everything.” (Private equity group)
  • “This answer could change as things develop in the months to come but for now we plan to look at opportunities the same as usual.” (Hospice company)

Several respondents describe they are more likely to look at new opportunities because of the favorable deals that arise from the marketplace.

  • “Greater disruption creates greater opportunities at better potential risk/reward prices (if underwritten correctly.)” (Private equity group)

Also, several respondents state they are less likely to look at new opportunities.

  • “We’ll look at mental health opportunities, but everything else is on hold right now.” (Private equity group)
  • “Although our business is doing well, our financial partner has other portfolio companies that are struggling and need attention.” (Behavioral health company)

Other factors being monitored

Respondents list travel limitations, social distancing, seller engagement due to the strain of COVID 19, reimbursement risk, supply chain problems and clinical staff shortages as factors they are currently monitoring during this changing economic environment.

Check back to hear what home care, behavioral health and private equity groups are saying as we weather the uncertain times ahead.

 

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