Challenges In Making Mergers & Acquisitions Work•Lack of knowledge about merger strategy, process...
Transcript of Challenges In Making Mergers & Acquisitions Work•Lack of knowledge about merger strategy, process...
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1© 2018. All Rights Reserved.
www.openminds.com15 Lincoln Square, Gettysburg, Pennsylvania 17325
Phone: 717-334-1329 - Email: [email protected]
#OMInnovation
The 2018 OPEN MINDS Strategy & Innovation Institute
June 6, 2018 | 2:00 pm – 3:15 pm
Ken Carr, Senior Associate, OPEN MINDS
Challenges In Making Mergers & Acquisitions Work
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2© 2018. All Rights Reserved.
I. Challenges & Best Practices Of The Merger & Acquisition
Process
II. Merger & Acquisition Case Studies:
• Danita Johnson Hughes, Ph.D., President & CEO, Edgewater Health
• Nicholas C. Riehl, J.D., MBA, VP of Corporate Development & General
Counsel, ncgCARE
• David Guth, Chief Executive Officer, Centerstone
III. Questions & Discussion
Agenda
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Challenges & Best Practices Of The Merger & Acquisition Process
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4© 2018. All Rights Reserved.
Mergers & Acquisitions Are A Growing Strategy
Mergers and acquisitions are a growing strategy in health care to create “scale” –resulting in greater market impact and profitability
The volume of deals is growing
– 115 hospital and health system deals announced in 2017 – a 13% increase over 2016
– Aggregated deal volume over $63 in health systems deals in 2017
The competitive market is changing – larger and stronger organizations
– 16 of the deals in 2017 involved organizations with over $500 million
– The average margin of acquiring organizations in the behavioral health market was 12.8%
Investors see the “value” in behavioral health services
– 62% of behavioral health merger and acquisition activity was with private equity
– Addiction treatment is considered a “fragmented market” with $42 billion in revenue by 2020
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5© 2018. All Rights Reserved.
Why Pursue M&A As A Strategy?
Economies of
Scale/Reduced
Costs Per Unit
Expansion of
Services
Expansion of
Geographic Reach
Opportunity to
Rebrand
Enhanced
Collaboration /
Population Health
Opportunities
Increased Internal
Talent
Increased
Opportunities for
Innovation
Better
Infrastructure &
Technology
Enhanced
Opportunities for
Payer Contracting
& VBR
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6© 2018. All Rights Reserved.
Risks Of The Merger & Acquisition Process
Merger Risks
• Negotiations ultimately fail
• Merged organizations never
achieve integration due to
incompatibilities
• Cost savings (“merger synergies”)
never materialize
• Leadership tensions impact
operations and outcomes
• Community constituents have a
negative reaction
Reasons Why Mergers Fail
• Lack of knowledge about merger
strategy, process & integration
plans
• Failure to find the right partner
• Lack of time and funding allocated
for due diligence and post-merger
integration activities
• Viewing mergers as solutions to
financial or leadership issues
instead of growth and positioning
strategy
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7© 2018. All Rights Reserved.
Challenges – Post Merger – Bigger & More Complex
Missing Needed Talent
Cultures Not Aligned
Adjusting To Larger Scale
Issues Missed In Due Diligence
Synergies Not Achieved
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8© 2018. All Rights Reserved.
The OPEN MINDS 10 Guiding Principles To Successful Mergers
• Start with a plan to create strategic advantage and don’t
waste resources due to lack of purpose and focus.
1. Planning comes first
•Lay out the process and decision criteria in advance so you
aren’t distracted as issues arise.
2. Be systematic and have a process
• Most organizations need additional knowledge and
expertise to make sound decisions – market intelligence,
legal, finance, political ramification
3. Use experienced talent
•Have a planned, deliberate (not necessarily slow) process
for finding potential partners
4. Be deliberate in partner selection
• Make sure goals of all partners line up early in the process
5. Be sure the priorities to all parties
•Due diligence involves investigation and assessment and
requires complete openness by all partners.
6. Expect to give and get full disclosure
•Strategic plans need to be flexible as realities change – be
willing to do things differently and better
7. Allow decision making to evolve
•Having multiple partner choices enhances to the quality of
the final partner selection decision
8. Build in time for a competitive process
•Ensure that there is an implementation plan that
includes tactics, assigned responsibilities, and a budget
9. Design an implementation plan
•Develop a communication plan to address questions and
concerns from consumers, customers, referral sources,
payers, regulators
10. Prepare for stakeholder questions
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Edgewater Health
Danita Johnson Hughes, Ph.D., President & CEO,
Edgewater Health
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Our Journey to Success
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Who we are:
44 years in business
Comprehensive behavioral health services provider
Budget: $15M
Employees: 150
8 locations
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Strategic Considerations
Viability
Business Growth and
Development
Mission Fidelity
Patient Population Health
Community Health and
Wellbeing
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WHERE DO WE GO FROM HERE?
MERGE, BUILD OR BUY
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DECISION:Buy Internal Medicine Practice
25 years in business
For-profit practice
14 Employees
Budget: $2M
Two Locations
• Gary, IN
• Griffith, IN
WHOLE PERSON HEALTH
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Primary Care ServicesGary and Griffith Offices
Our services include the following:
Routine Adult Well Care
Internal Medicine
Women’s Health
Sick Visits
Physical Exams
Disease Screening
Chronic Disease Management
Patient Education
ab Screening
Cardiac Evaluation
Diabetes Screening and Management
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Challenges
Cultural issues Three different EMRs Different business
processes Billing different codes Workforce and
training issues Credentialing Malpractice insurance
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Lessons Learned: Operations
Biggest challenge: IT
Primary care coding and billing
Communication between service
Primary care clinical quality measures
Physician Pay: Use of RVUs
Silos not easy to overcome
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Opportunities Provided
Creation of a health home
Continued organization growth
Improved quality of care
Better coordination of care
Marketing Award
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Our Future Additional acquisitions opportunities
FQHC designation positioning
Additional expertise
OBGYN
Pediatrics
Dental
Certified Behavioral Center
positioning
Stabilizing finances
New comprehensive EMR
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Road To Success
SUCCESSNext Exit
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Questions? More Information?
Edgewater Health
Danita Johnson Hughes, PhD
President/CEO
1100 W. 6th Avenue
Gary, IN 46402
219 885-4264
edgewaterhealth.org
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ncgCARE
Nicholas C. Riehl, J.D., MBA, VP of Corporate
Development and General Counsel, ncgCARE
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Mergers & Acquisitions-Our Experience
Nick Riehl, VP Corp Development
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About Me In 30 seconds
• First job post grad-school was as CFO/COO of $5mm mental health provider in PA
• Taught a class on M&A
• Company targeted by ncgCARE for acquisition 2 years ago
• I went to ncgCARE, ncgCARE runs my former company under management agreement
• Now I oversee M&A activities at the company
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About ncgCARE
• For-profit, multi state provider
• Mission, values driven
• 3 years of acquisitions experience
• Fast growth, strong team
• Currently about $90mm in revenue
• 1900 employees
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ncgCARE History
• Founded 1993 as Northern Virginia Counseling Group – group counseling practice
• Early programming focused on self-pay individuals
• Focus on dual diagnosis treatment
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About Us
• Visionary owner
• Saw community-based care as the future of behavioral health, began opening offices across the state
• Changed name to National Counseling Group with an eye towards bigger things in 2005
• Our CCO is employee #2. Our COO is employee #5
• Prior to acquisitions, created Embrace (Treatment Foster Care) and Envision Counseling (Private pay)
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So How Did We Become An Acquirer?
• Grew to almost $50mm by 2014
• Took a major rate cut in a primary program
• Decided being solely dependent on the Commonwealth of Virginia was a risky proposition
• With diversification in mind, we engaged an investment banking firm to craft our strategy
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Our Acquisition Strategy
• Engaged investment bank to find firms:
– Between $5-$20mm in revenue
– Eastern seaboard only at first
– High quality providers, preferably utilizing mainly evidence based practices
– MH, Substance Abuse, Intellectual disability
– Outpatient, community based, low intensity residential services
– For profit preferred…but non-profits are welcome too!
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Our M&A Experience
• 5 deals closed
• Several LOIs outstanding
• Interviewing new potential partners each month.
• Acquisition capital: • Series A- Bank funded.
• Series B- Mezzanine capital, line of credit
Compound annual growth rate
=26%
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Our Expectations
▪Upside benefits…▪Quality
▪Access (people, risk, contracts)
▪Diversification (geography & services)
▪ Technology / Data
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Turning Point Family Care
• Raleigh, NC MH Provider
• $6,000,000 Revenue in two locations
• 100 employees
• OP, Intensive In-Home, Peer, Day TX
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Independent Adult Day Services
• Day Support for individuals with Intellectual Disabilities in Richmond, VA
• $300,000 revenue
• 7 employees
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Appalachian Community Services
• Comprehensive provider of behavioral health services located in far-western North Carolina
• 200+ employees
• $14,000,000 revenue
• Services include OP, Intensive In-Home, Facility and Mobile Crisis, Intellectual Disability Group Home and Community Services
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Starlight Behavioral Health
• Intellectual Disability Provider in Huntington, WV
• 180 employees
• $6,000,000 revenue
• Services include individual support, behavior intensive group home, forensic group home, behavior support, and service coordination
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Grace Harbour
• Behavioral health provider headquartered in Peachtree City, GA, with offices around northern half of state
• 55 employees
• $4,000,000 revenue
• Services include OP, MST, FFT
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Challenges
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Challenges
• We didn’t expect it to be easy…
• Stresses at all levels of the organization
• Because BH is so different state to state, its like running 7 separate companies
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Challenges – The Organization
– What is the right organizational structure to maximize chance of success?
– Are the right people in place?
– Are there right people on wrong seat on the bus?
– There were changes, but so far there has been a role for everyone
– Need people who are excited for change and want to learn new things every day
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Challenges - People
– People assume they’re getting laid off (or getting a raise)…it takes time to develop trust
– For mission driven companies, it takes time to convince them that you’re mission driven too
– How to use owners who want to remain involved
– How much face-to-face attention is needed?
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Challenges - Technology
• Biggest challenge has been internet connection –it takes consistent service for videoconferencing
• HRIS systems are difficult (pay frequencies, practices, etc.)
• Accounting, expense management tends to be the easiest
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Challenges - Technology
• eHRS
– Everything would be perfect if we were on the same eHR…
– It takes a lot of time and resources to change systems
– There is no way to do it on day 1, so your integration planning is really an intermediate plan
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Solutions
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Solutions?
• Consistent communication (video messages)
• Using the org structure to communicate
• CareCon
• Domo - dashboarding
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Have We Succeeded?
• Mostly yes…
• Back to our expectations
▪Quality
▪Access
▪Diversification
▪ Technology / Data
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Centerstone
David C. Guth, Jr., Chief Executive Officer,
Centerstone
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OPEN MINDSJUNE 6th, 2018
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CENTERSTONE BRAND PROMISES
Brand Promises
Access – Individuals access treatment quickly and easily.
Personalized Care – Treatment is tailored to individual needs, goals
and life.
Treat to Target – The success of treatment is measured according to
the individual goals that clients set with their treatment team.
Innovation and Value – Individuals and payers know Centerstone for
cutting edge and high value clinical care.
Delivering care that changes people’s lives
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CENTERSTONE AT A GLANCE
(Inclusive of the Uspiritus merger slated to take effect 7/1/18)
• Noble Purpose: Delivering care that changes peoples lives
• A not-for-profit healthcare system with annual revenues of $380 million
• 200 facilities in a basic five state footprint (IN, IL, KY, TN, FL)
• 22 service lines spanning mental health, substance use, intellectual and developmental disabilities, and
integrated primary care
• 5,200 staff serving 180,000 people each year
• Result of the affiliation and or merger of 20 formerly independent non-for-profit organizations
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BECOMING THE IDEAL COMPETITOR
What does that look like and Why:
In scale?
In service lines?
In capabilities?
In value to consumers, referral sources, payers, staff?
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Market Level Opportunities: The emerging payer,
partnership, and policy marketplace, coupled with the emerging
evidenced base models, technologies, pathways, and practices of
care.
Opportunity Ceiling: The limits of opportunity
regardless of capabilities created by visibility, reputation,
trust, and leverage as perceived by external stakeholders.
Capabilities: Demonstrated competencies
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THE FIVE WHYS
• Why Scale?
• Why Merger?
• Why Us?
• Why Them?
• Why Us? (again!)
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ACME, INC. GROWTH PLAN
Now One Year Three Years Five Years
$WW $XX $YY $ZZ
Growth Tactic 1 year Certainty 3 year Certainty 5 year Certainty
Organic Growth
same store
new market or service
Acquire
non profit
for profit
Acquired
non-profit
for profit
Affiliation with
smaller scale
similar scale (+/- 40%)
larger scale
Joint Venture
non-profit
for –profit
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THE PROCESS
• Dating - NDA
• Going Steady - Letter of Interest
• Engaged - Letter of Intent
• Marriage - Closing
• The Real Work
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Elevates Opportunity
Ceiling
Expands Capabilities
Strengthens Capabilities
Interested
Affiliation Targets
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MUTUAL ATTRACTION
Interested Interesting
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MAKING IT WORK
• Culture
• Humility
• End versus How
• Accountability
• Grieving
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Questions & Discussion
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