There Is No Such Thing As A Healthcare Merger (And Here’s Why)

By Tom Schramski, PhD, CMAA

Volume 4 Issue 10, May 9, 2017

unnamed (1)The House of Representatives just passed the AHCA; there are increasing questions about Medicaid and block grants; downward pressure on reimbursement rates is growing; and the pace of innovation is mind blowing.

How do healthcare executives, including nonprofit leaders, get their heads around all of this? The solution many choose is “merger.” They calculate that growth and consolidation can increase operating efficiencies, bring new talent aboard, and enhance diversity and market access. Why not combine forces with another company and have a partner to help you face all this uncertainty?

Unfortunately, this enthusiasm for mergers may be based on the misapprehension that such a thing as a merger even exists, in the healthcare industry or anywhere else for that matter. While a “merger of equals” is possible in theory, in real life such arrangements too easily sour.

The ideal merger is supposed to bring both parties together to create a new identity and structure with (perhaps) a modest sacrifice of brand and mission along the way. Thus defined, a successful merger is like a successful marriage.

However, successful mergers may be less common than successful marriages for several key reasons:

  1. Turf Struggles: In a merger, one party tends to dominate the relationship. While missions and cultures may be very compatible, one organization typically moves to the foreground and takes power.
  2. Misalignment: In a merger, there is no such thing as perfect alignment between the capabilities of the two organizations. Compromise necessarily and always occurs through the integration process.
  3. Redundancy: Regardless of the intended “synergy”, the new organization won’t need as many administrators and clinical managers. This can mean layoffs, disruption, and sometimes an exodus of disgruntled talent.
  4. More Redundancy: The new organization rarely needs duplicate C-level executives. The history of companies that attempt to have co-CEOs is hilariously dismal.
  5. Director Reorganization: The Board of Directors of the merged organization is rarely of a 50/50 composition. One group of directors tends to outnumber the other group, thus favoring one strategic direction over the other.

Ideally a merger results in a single, more diverse company with strong alignment of employees around mission and vision, but achieving this ideal requires hard work. Those that succeed focus on integration before the deal is closed.

Most mergers turn into “absorptions” where one entity assumes, and the other faction cedes, control. When merging healthcare companies recognize in advance this may happen there’s a greater likelihood of a good outcome for the enriched organization.

Does this mean you should NEVER consider a merger? Quite the opposite. With the right guidance, a successful merger is possible. However, we always start any “should we consider a merger” discussion with a disarmingly simple question:

What do you really want to accomplish?

If the goal is to manage uncertainty or even distress, mergers and absorptions can be an excellent choice to build a more lean and capable organization, especially in the nonprofit sector. The current healthcare environment favors consolidation and size as a hedge against reimbursement turbulence. It also increases one’s ability to add expensive technology.

If the goal is to grow quickly or plan for a transition, acquisition and sale are often better vehicles for diversification or an exit. Acquisitions, in particular, tend to be simpler than mergers because there is little confusion from the beginning about who is in charge.

Clarity about organizational vision and the discipline to implement a merger or sale lay the foundation for a positive future. Knowing your company well and being able to say “no” as well as “yes” will greatly increase your odds of a good outcome.

The same as in a successful marriage.

If you would like to personally discuss this article, the value of your company, or how to get the best price when you sell it, you can reach Tom directly at tschramski@vertess.com or 520.975.5347.