Examining 2015’s M&A Key Activity Patterns with the Experts at ST Advisors

With 2015 being a year of unprecedented merger and acquisition (M&A) activity in healthcare, Healthcare Informatics Editor-in-Chief Mark Hagland sat down to speak with Michelle Mattson-Hamilton and Ben Rooks of ST Advisors, a strategic and financial advisory firm focused on the healthcare IT industry. Michelle Mattson-Hamilton spent three years in corporate strategy in the telecommunications industry before making the move to healthcare IT and joining ST Advisors five years ago; Ben Rooks, before founding ST Advisors in 2009, spent 15 years on Wall Street as both an equity research analyst and investment banker focusing on healthcare IT.

Mattson-Hamilton and Rooks coauthored an analysis of 2015’s M&A activity in healthcare IT, published on Tuesday for Healthcare Informatics. Hagland spoke with the analysts regarding the analysis contained in their report. Below are excerpts from that interview.

In your analysis that we published yesterday online, you noted that 2015 was a high-water-mark year for mergers and acquisitions, but that you see M&A activity softening or weakening in 2016. Tell me about that.

Michelle Mattson-Hamilton: So, 2015 really was a landmark year. I actually just read something that said it was a high-water-mark year in many markets, not just healthcare. And it’s not just in terms of the number of acquisitions, the highest number of acquisitions since 2007, but the amount of private equity investment involved, it was really a landmark year.

Why do you think that things peaked in 2015?

Ben Rooks: Part of it could honestly just be regression to the mean, in this instance. Though a lot of smaller companies had been funded that don’t necessarily have long-term sustainability, and the investors in those companies will be looking to the M&A markets to rescue them. And it would be an interesting exercise to go back to a rolling five-year, historical analysis of M&A activities—when an M&A company acquires a company, the typical length for holding it is about five-and-a-half years. So you could go back and see who traded in 2011 or 2012, and figure out who might be thinking about an exit in 2016 or 2017.

Understood. Meanwhile, what do you see happening this year?

Mattson-Hamilton: In the first couple of months of 2016, there have been quite a few transactions, but the investor perspective has bene more cautious. That’s because there was so much aggressive activity in 2015, and people were paying very aggressive multiples for acquisitions. But now that the capital markets are starting to show restraint, that’s starting to pop over into the healthcare IT market. And given that last year was such a high-valuation year, things are coming back down now.

Rooks: In some cases, crazy-value was involved. I’ll say openly that I think the prices IBM has been paying, for Truven, Merge, all of the companies they’ve acquired—have been crazy. Sometimes, in other instances, I would describe the valuations as being in the “aggressive-value” category.

Mattson-Hamilton: And aggressive valuation or over-valuation is problematic, because it feeds on itself. You have a couple of aggressive valuations, and then those over-valued companies believe in their monetary value, and it builds. So it just got way out of control with Merge and Phytel, etc.

Meanwhile, you noted that most mergers and acquisitions last year reflected alignment or realignment around broad policy and industry trends, especially the shift away from volume in healthcare provider reimbursement and towards value. Let’s drill down a bit on that. So this activity broadly reflected the broad policy trends of U.S. healthcare?

Mattson-Hamilton: Yes. Companies are setting themselves up to be effective long-term. There weren’t a lot of transformational deals; instead, these companies were setting themselves up to be more effective in the future. And depending on where the main company sat in its sub-vertical, they weren’t changing anything radical 180 degrees.

Rooks: And there were many what I would call “tuck-in acquisitions,” last year.

Mattson-Hamilton: Some were a bit more than tuck-in acquisitions, but we didn’t see a lot of transformational acquisitions.

Did most of the mergers and acquisitions you’ve written about in the article make good conceptual and business sense to you?

Rooks: I think they did. I think a lot of them were good, thoughtful actions. Cerner-Siemens, as I shared it with you, for example, made a lot of sense.

Mattson-Hamilton: Or, for example, athenahealth’s acquisition of RazorInsights and WebOMR: those made sense, because they helped Athena move into the inpatient market.

Rooks: Sunquest’s acquisitions, or QSI’s acquisition of Gennius, or CPSI’s acquisition of Healthland, those all made sense. And that deal had been in the works for years. Others… IBM is trying to build itself a platform, so given that they wanted to build something for Watson, acquiring Truven, Phytel, Explorys, made sense, though the valuations were shocking. But that’s what can you do if you’re IBM Michelle, can you think of any major head-scratchers? No apples-and-screwdrivers acquisitions that you can think of?

Mattson-Hamilton: Honestly, not that I could see. And I took a pretty careful look at both the companies in the 100 and not in the 100. Pretty much all the acquisitions make sense. It’s just that quite a few of the valuations were relatively aggressive. But they were all strategically relevant, within the confines of what the companies were trying to do with their businesses.

Is all this M&A activity helping to facilitate needed innovation?

Rooks: There are three kinds of M&A: financial engineering, of which I’m not a huge fan; stuff that makes business sense, like CPSI’s acquisition of Healthland; and there’s this kind of innovation leapfrogging. athenahealth is a great example: an innovative company in the outpatient sector, and so they bought some smaller companies in the inpatient space.

And in that context, then, overall, is the activity shifting vendors in the right direction per innovation?

Rooks: No, I don’t think so. It’s really hard to buy innovation; and the companies that have been most successful have not acquired their way into innovation. And the idea of, we’re going to acquire you guys because you’re so innovative and edgy and disruptive, and you’ve got such great technology—I’ve rarely seen it work to buy like that.

Mattson-Hamilton: And sales are really what matters, and sales are really hard in healthcare.

Rooks: And people in Silicon Valley can say, we’ll invest in innovation, but it’s not about innovation, it’s about adoption.

Mattson-Hamilton: It’s not that we don’t think there are innovative companies, or disruptive companies, because there absolutely are. You’ve seen it time and time again, you have to be innovative and disruptive, but you still have to sell your product.

With regard to the biggest EHR vendors, will they continue to grow through acquisition and sales growth, or will they be disrupted at some point by smaller competitors?

Rooks: Different sectors have different kinds of ecosystems; that’s not an idea original with me, but I’ve happily appropriated it! So there are two types of ecosystems, really, according to this metaphor: there’s the savanna, and there’s the rain forest. In a savanna ecosystem, you’ve got big cats and gazelles, and maybe five to seven species; and then there’s the rainforest ecosystem, with countless smaller species supported by the dense forest foliage. Broadly speaking, healthcare IT will continue to be a rainforest ecosystem. But certain subsectors, like the EHR sector, have developed into savannas. Overall, though, healthcare IT will continue to be a rainforest. And it’s great for M&A activity, because larger vendors can buy these little tuck-in companies that fulfill a need that they have.

Mattson-Hamilton: and the revenue cycle management sector is a rainforest.

Rooks: Yes, RCM is the archetypal rainforest ecosystem. These smaller companies can make a living out of working with customer organizations, and there’s no need for individual patient care organizations to have to align themselves with gigantic vendors to have a good experience.