Health-care M&A off to a strong start in 2011
There was a noticeable resurgence in merger and acquisition activity in the second half of 2010, with corporate and private equity players once again sensing an uptick in confidence in the market. While market confidence is not anywhere near the levels of five or six years ago (and there is no expectation that they will be at any time in the near future), it is nonetheless trending in positive territory.One of the more active segments of the M&A market last year, and thus far in 2011, is health care (including biotechnology, life sciences, pharmaceuticals and hospitals). Supported, in part, by President Obama's enactment of the Patient Protection and Affordable Care Act, health-care activity, whether through acquisitions, mergers, joint ventures or licensing transactions, has been robust thus far in 2011.Though the Republican Party gained control of Congress in last year's mid-term elections with a platform that focused heavily on a pledge to repeal federal health reform, the threat of such action has not yet resulted in a retreat from healthcare M&A activity. In fact, according to Irving Levin Associates Inc. in a recent edition of its Healthcare M&A Monthly newsletter, deal activity for health-care transactions in February 2011 alone was on a record-setting pace (some 60 deals worth approximately $32 billion were reported).While most analysts do not expect this pace to continue for the long term, it nonetheless suggests that the market for health-care transactions will remain active for the time being.Such vigorous activity underscores a much larger trend seen throughout the M&A market in general, which is that buyers (whether corporate strategic buyers or private equity and financial buyers) have amassed significant amounts of cash during the financial crisis of the past few years (nearly $1.9 trillion, according to a recent federal report). These companies are now ready, willing and able to start spending their war chests at a time when banks and other lenders are once again demonstrating a willingness to resume lending (still at near-record low rates).While the Obama administration has made a push for these companies to use their cash reserves to create jobs, the immediate beneficiary, thus far, has been the acquisition market.An active yearAs the general perception that the rate of growth of health-care costs is not sustainable, the health-care and insurance industries will continue to demand new products and improved services to not only manage the growing size of the aging population but to also control, if not reduce, costs.An interesting angle of the current health-care M&A deal activity, however, is that it has not been limited to big pharma swallowing up small and middle-market companies. Small and mid-sized companies have shown an interest in buy-side M&A transactions as well.As a result, startups and smaller companies, which may have otherwise been acquired much earlier in their corporate life cycle in the pre-financial crisis market, have now themselves grown into active companies, and their strategic plans no longer involve a desire to be acquired.Now they are looking to grow and to compete with the larger companies in their industries. As a result, these smaller companies are going to market with products and are generating their own cash flows and reserves and are now, themselves, poised to take advantage of M&A opportunities that they could not have previously considered.M&A has long been an avenue for companies to use in an effort to supplement their organic growth initiatives, and the activity we see now is no exception. Health-care companies are facing the demands of an aging population and the constant threat of expiring drug patents. As a result, companies are looking to bolt on to their existing business new products as well as alternative sources of revenue in an effort to address these demands.Not surprisingly, M&A, in conjunction with homegrown R&D, continues to be a valuable component of companies' strategic growth initiatives.As for private equity's impact on health-care transactions, the start of a selloff trend by private equity-owned businesses is anticipated, but at the same time continued investment in health-care companies is also expected.During the financial crisis, when M&A activity slowed considerably, private equity owners were forced to turn their attention to managing the businesses that they had acquired due to the limited selling opportunities. As a result, companies remained in private equity portfolios for longer than perhaps was originally intended. Now, with a more active deal market, we will likely see private equity owners begin to sell the matured companies that they have held in their portfolios for a number of years.At the same time, however, private equity has indicated a strong interest in continuing to invest in companies whose technologies and service models are being developed and expanded to address needs of the aging population and managing health-care costs. To this end, private equity would surprise no one if it remains more active on the investment side of health-care transactions than on the sell side.All told, health-care M&A, and the M&A market in general, should have an active year, though it is not yet clear what effect (if any) the recent events in the Middle East and Japan will have on this positive outlook.Andrew Share, an associate in Nixon Peabody LLP's Global Business & Transactions practice, can be reached at 603-628-4053 or firstname.lastname@example.org.