The failure rate for mergers and acquisitions (M&A) sits between 70 percent and 90 percent, according to collated research from a recent Harvard Business Review report. The reasons for such a high rate of failure include Inadequate Due Diligence.
M&A is an essential tool for adapting to the changing healthcare landscape and provides opportunities to achieve expertise, realize efficiencies, gain access to capital, improve clinical performance, fill gaps in the care continuum, expand service line and product offerings, and meet community health needs, among others.
So, what goes wrong that often due diligence, a critical component to successfully achieve the goals of M&A, gets overlooked?
I have assisted many entities over the years ranging from physician practices, management service organizations to hospital mergers with due diligence. I have developed a successful M&A playbook to address this question in a series of two articles. In this first article, I will share with you, the fundamentals of what due diligence entails, why it matters, and some best practices and key takeaways. In the second article, I will post in a few weeks, I will share with you what I did and how I approached leading successful due diligence efforts and teams across the healthcare industry.
What is due diligence?
- The due diligence activity helps get to know the business and provide an accurate picture of the fundamental business areas including operations, finance, legal, regulatory, and payor contracts. This information gathered and translated determines the underlying value of the transaction, how to structure the deal components and ultimately financing, determine the degree of integration, and define issues early on and how to mitigate these so buyer and seller can consummate the transaction.
- It is important to start due diligence with a NDA (non-disclosure agreement), LOI (Letter of intent) or MOU (memorandum of understanding) to outline the willingness of both parties to move forward and exchange confidential information.
Why is due diligence important?
- Besides understanding the business and shaping the transaction, due diligence helps develop an integration plan and mitigate the inherent risks that evolve when organizations blend and transfer or gain new services.
- The due diligence activity, also, gathers data about the people and culture within the organization, fosters relationships and determines ways to navigate differences and build alignment between organizations prior to merging.
What does a due diligence investigation involve?
- There are several components in a due diligence checklist necessary for an investigation including: intangibles, legal, financial information, vendor relationships, payor contracts, employees and management, information systems, marketing, strategic plans etc.
- Besides a due diligence checklist, evaluate the cultural synergies, as regardless of goals, the cultural compatibility of leadership, staff and physicians underpins a strong partnership and the long-term success of the transaction.
Who carries out due diligence?
There are a multitude of advisors that bring different expertise and contribute to the due diligence process.
- CPA: for accounting and tax review.
- Consultant: experience with evaluating the business model and value proposition and leading the due diligence team to gather all pertinent information necessary in due diligence.
- Attorney: legal review with experience in M&A.
- 3rd Party Valuation: value business to determine fair market value or selling price.
- For larger and more complex transactions:
- Different levels of committees with core focus i.e., IT/Data integration, alignment of service lines opportunities.
- Cross functional team with specialized expertise across the core components i.e., human resources, finance, information systems, risk management, compliance.
- The process to complete due diligence ranges from 90 to 120 days depending on complexity.
Where does it take place?
Data room and on site.
- A data room is a secure cloud-based centralized file sharing system set up usually by buyer to upload and store the data shared in due diligence.
- There may be a need to conduct due diligence on-site. This on-site due diligence adds 3-6 weeks to assemble the team and coordinate on-site visits.
Due Diligence Best Practices and Key Takeaways
- Identify the M&A value drivers and success factors. Perform this task early in the process and translate them into an M&A intent, the how, why, and where to achieve the goals. Established M&A intent and goals drive difficult conversations, create alignment within the leadership team and prioritize for the due diligence team what information is important to focus on in the due diligence activity.
- Address organization and people issues upfront. Place as much focus on strategic and culture due diligence as on the financial, legal, and other aspects of due diligence. Organizational and people issues are essential to the success of most acquisition integrations and establishes how the organization and people fit together post-merger.
- Drive accountability. The leadership team must sponsor and remain accountable for the success of the deal and for achieving the targeted synergies. Following the launch, leaders need to be identified to ensure mutual satisfaction and the goals of the M&A are achieved.
- Create the right due diligence team and integration team. It is imperative to have the right mix and level of expertise and specialization to conduct the investigation and limit exposure.
- Technology plan to seamlessly transition data. Without data due diligence and consistency in the data models, an organization cannot present a consistent experience to patients, and it slows cultural integration efforts. Identify disparate systems and develop a plan to connect these systems as a steppingstone to merging. Early communication and planning of IT priorities will help establish a realistic timeline for communicating to those affected by the M&A. Treating IT as one key component of integration also supports ROI planning and mitigates the potential for costly, slower-than-planned integrations.
- Review terms of contracts. Review the terms of the contracts and determine what can transition immediately and what requires renegotiation or a transition plan.
- Start detailed integration planning during due diligence. One of the primary deliverables of due diligence is an integration plan focused on how to realize the synergies and deal drivers identified during due diligence. The integration team needs to be involved earlier on to create an integration plan as that team is responsible for achieving the identified synergies and how the organizations will work together.
- Identify what is the budget for integration vs costs of the transaction. Uncover expenses that will need to be planned for in integration and avoid unnecessary costs, such as duplicative IT applications, vendor contracts or investments in new equipment or facilities.
Due diligence is an important part of M&A and shortchanging it will fail to reveal key issues that can pose risks to the buyer organization. These best practices are just a sampling of considerations to conduct a successful due diligence and achieve the goals of M&A. There are other considerations and varies based on the size and scope of the transaction.
If you plan ahead and invest time and effort to conduct due diligence you will be better positioned to achieve a successful M&A, to diversify and grow benefiting employees, patients and communities across the care spectrum.
