Kaufman Hall Report: M&A Activity Continued Forward During Third Quarter, Despite COVID-19
A new report from the Chicago-based consulting firm Kaufman Hall was published on Oct. 6, looking at merger and acquisition (M&A) activity during the third quarter of 2020. The entire report, “M&A Quarterly Activity Report: Q3 2020,” is available here.
“In our last quarterly report,” the Kaufman Hall leaders wrote, “we noted that the COVID-19 pandemic had produced a much less dramatic decline in M&A activity than might have been expected. We noted that the second quarter of 2020 saw two transformational transactions announced (transactions in which the smaller party, or seller, has annual revenues in excess of $1 billion) and a record-breaking average seller size in excess of $800 million. We also predicted that the pandemic might strengthen the rationale for strategic partnerships, leading to a potential uptick in M&A activity as the industry continues with its repositioning.”
The report’s authors see several key themes:
>Four transformational transactions were announced, including the combinations of Cone Health and Sentara Healthcare in the Southeast, Lifespan and Care New England in Rhode Island, CHI Franciscan (CommonSpirit) and Virginia Mason in the Pacific Northwest, and Novant Health, UNC Health, and New Hanover Regional Medical Center in North Carolina. This ties the highest number of transformational transactions that we have seen in a single calendar quarter.
> The pace of certain transactions that were previously announced continued unhindered by the pandemic. For example, two significant community health systems (with annual revenues in the $500 million to $1 billion range)—Northwest Community Healthcare in suburban Chicago and Saint Peter’s Healthcare System in New Jersey—moved forward with their transactions in Q3. Northwest Community announced a partnership with NorthShore University Health System and Saint Peter’s signed a definitive agreement with Robert Wood Johnson Barnabas Health (RWJBH), following its announced intention in December 2019 to explore a strategic partnership with RWJBH.
> Average size of seller by annual revenues remains at historically high levels, at just under $400 million in Q3.
Further, the report’s authors noted that, “In our last quarterly report, we noted that the COVID-19 pandemic had produced a much less dramatic decline in M&A activity than might have been expected. We noted that the second quarter of 2020 saw two transformational transactions announced (transactions in which the smaller party, or seller, has annual revenues in excess of $1 billion) and a record-breaking average seller size in excess of $800 million. We also predicted that the pandemic might strengthen the rationale for strategic partnerships, leading to a potential uptick in M&A activity as the industry continues with its repositioning.
The authors also state that “Market observations and announcements from Q3 indicate that these predictions are materializing:
> Four transformational transactions were announced, including the combinations of Cone Health and Sentara Healthcare in the Southeast, Lifespan and Care New England in Rhode Island, CHI Franciscan (CommonSpirit) and Virginia Mason in the Pacific Northwest, and Novant Health, UNC Health, and New Hanover Regional Medical Center in North Carolina. This ties the highest number of transformational transactions that we have seen in a single calendar quarter.
> The pace of certain transactions that were previously announced continued unhindered by the pandemic. For example, two significant community health systems (with annual revenues in the $500 million to $1 billion range)—Northwest Community Healthcare in suburban Chicago and Saint Peter’s Healthcare System in New Jersey—moved forward with their transactions in Q3. Northwest Community announced a partnership with NorthShore University Health System and Saint Peter’s signed a definitive agreement with Robert Wood Johnson Barnabas Health (RWJBH), following its announced intention in December 2019 to explore a strategic partnership with RWJBH.
> Average size of seller by annual revenues remains at historically high levels, at just under $400 million in Q3.
With regard to emerging trends, the Kaufman Hall leaders see four main ones:
> Transactions are moving forward unaffected by the pandemic. Among the more significant transactions announced this quarter, many had been in progress before the pandemic struck. It appears that the pandemic had little impact on the pace or partner’s high interest for these tie-ups. New Hanover Regional Medical Center issued its RFP in January 2020 and assessed proposals from six health systems before deciding on a collaborative proposal from Novant Health and UNC Health.
> Northwest Community Healthcare made its decision to join NorthShore following an 18-month strategic assessment by its board. Saint Peter’s had announced a commitment to exploring a partnership with RWJBH in December 2019; the definitive agreement it signed with RWJBH in September 2020 capped a three-year evaluative and discernment process for a strategic partner.
> Even certain transactions that were put paused due to the impacts of COVID-19 were reignited during Q3, as evidenced by the execution of a definitive agreement between UMass Memorial Health Care and Harrington HealthCare.
> Partnerships have been strengthened or revived. Last quarter, we reported that Lifespan and Care New England had begun to explore reviving earlier plans to combine, which had been suspended in 2019, following the close partnership the systems forged in response to COVID-19. This quarter, those conversations resulted in formal letter of intent to merge the two systems.5 CHI Franciscan and Virginia Mason noted their preexisting partnerships in obstetric and women’s health and radiation oncology in their announcement of plans to form a joint operating company.
