Healthcare Shines in M&A’s Major Comeback So Far In 2021
In 2020, everything changed. Jobs were cut, businesses were shuttered, and too many people lost their lives. But the global pandemic also triggered a response that is creating new jobs, stimulating innovation, and forging new business models. The market for mergers and acquisitions has weathered the storm of COVID-19 and is surging into the second quarter of 2021 with all pistons firing, particularly in healthcare.
Today, there is so much more besides COVID testing and vaccinations happening behind the doors of healthcare providers worldwide. Think about it. Your town's family doctor's office down the street might now be part of a giant healthcare system. Or, your local urgent care center may be considering a merger with a leading healthcare corporation. These are unprecedented times in virtually every facet of the word in every nook and cranny on the planet, and healthcare is at the forefront when it comes to M&A.
In 2020, the healthcare industry was beaten down from the overflowing of COVID patients causing the ripple effect of non-emergency procedures' postponements. Looking forward, however, healthcare M&A activity is set to increase with the return of non-urgent medical interventions and healthcare companies betting on growth to get stronger and healthier.
The 2021 rebound
Early in 2020, there was a massive drop-off in M&A deals compared to the prior-year period, particularly for more significant transactions. However, the M&A market still had plenty of potential for momentum. Tragically, as the coronavirus's full impact hit by late March, most deal-making came to a screeching halt. Since companies put their resources into transitioning staff to working from home, reviewing finances, and maximizing dollars, many paused any pre-planned M&A deals and stopped filling the top of the funnel for a new pipeline.
As companies, investors and bankers adapted to virtual deal-making over the last year, M&A in sectors unaffected or boosted by the lockdown slowed. By summer 2020, transactions grew each month with key announcements in technology and healthcare corporate consolidations. Despite a slowdown for deals in the second quarter of 2020, activity increased in the second half, triggering an annual volume above $3 trillion for the seventh year in a row. And by winter, the pace of M&A deals exceeded the historical average with a fourth-quarter record of 1,250 global M&A transactions, equal to over $1 trillion.
This year, there is already significant growth on the horizon. In fact, 53 percent of U.S. executives said their companies plan to increase M&A investment in 2021. And, according to Morgan Stanley, “All the elements are there for an active M&A market in 2021, from corporations looking for scale and growth to private equity firms and SPACs looking to invest capital.” For some, growth will come from market leaders finding strength in a recovering economy. In contrast, others that have seen business models destroyed by the pandemic will explore how smaller deals in complimentary sectors can help innovate their businesses. Overall, targets will come from sellers, including businesses that have struggled during the recession, private investors, and companies that are reassessing assets.
M&A activity in healthcare to watch
As 2021 unfolds, there will an increase in urgent care M&A activity. We will likely see urgent care systems buying smaller urgent care systems, healthcare companies that don't have much to do with urgent care making mergers and acquisitions, and urgent care buying companies that complement their services. For example, retail chains like Walmart and CVS are opening more healthcare clinics. These days, urgent care clinics are not just used for emergency or immediate problems but are now also giving out vaccines and even doing annual physicals.
In healthcare, a merger's primary goal is to improve the quality of care while concurrently driving efficiencies that should lower costs. The reality is that today, it’s becoming more challenging to stay in business when your company is only known for one thing. Oftentimes, larger companies offer more services, which helps the patient and the provider’s pocket. Most of the time, consolidation happens because customers prefer to combine trips. The fear of exposure to the virus and aiming to limit outings will likely push healthcare companies to make moves in M&A as it relates to consolidation.
As of late, youth sports activities have become more sophisticated, with more businesses catering to them. As popularity grows, unfortunately, sports-related injuries grow too - creating more opportunities for healthcare companies. Ultimately, the pandemic is another reason for healthcare companies to offer all-in-one facilities. Despite the factors fueling deals, healthcare companies are going to see more M&A activity is due to the growth vector it can bring to a business.
M&A trends triggered by COVID-19
Several significant trends may characterize a robust M & M&A market for the rest of 2021 and beyond. First of all, we can expect more megadeals (transactions of at least $5 billion) in 2021, from pharma companies acquiring early-phase products and private equity acquisitions. With larger companies leading in this area, this activity will come even as company valuations have increased from their COVID-19 lows. The increase in megadeals in the second half of 2020 helped total U.S. deal value bounce back strongly going into 2021.
In addition, companies pursuing stock-for-stock mergers to gain scale comprised many of the largest corporate M&A transactions. Scale has always been important, and the pandemic has proven that you have to be large enough in order to survive. Scale and more access to capital markets have been a considerable benefit for larger companies. As the pandemic rages on, corporates remain focused on accessing capital, strengthening positions, and investing in scale, and consolidations should continue in sectors powered by technology and healthcare.
Private equity firms should continue to contribute to 2021 M&A volume meaningfully. In 2020, sponsor-backed transactions comprised 26 percent of M&A activity - the highest since before the financial crisis. In fact, by the end of 2020, financial sponsors had a record $2.9 trillion of capital. Last year, we saw many traditional private-equity funds investing across the capital structure to provide companies with cash during a challenging time.
Looking ahead
Looking later in 2021 and beyond, as vaccinations increase and business conditions in COVID-impacted sectors improve, companies will likely focus more on spending to accelerate growth, scale, and digitize their businesses.
As the global economic rebound aims for more growth this year, those low-interest rates will continue to make borrowing cheaper than ever before. This, along with the prospect for companies’ renewed confidence to spend, could create more deals, especially in healthcare-related business. So, M&A remains one of the most attractive ways to achieve growth, which should make 2021 a busy year…
Brandee Diamond is an M&A partner at Foley & Lardner LLP in San Francisco. Brandee is able to provide legal advice to investors, corporate boards, and public and private companies, with a strong focus on healthcare.
Louis Lehot is an emerging growth company, venture capital, and M&A lawyer at Foley & Lardner in Silicon Valley. Louis spends his time providing entrepreneurs, innovative companies, and investors with practical and commercial legal strategies and solutions at all stages of growth, from garage to global.
Eric Chow is an M&A lawyer with Foley & Lardner LLP in Silicon Valley. Eric spends all of his time helping buyers and sellers navigate liquidity transactions with optimal outcomes.
