What’s Ahead for Strategic Healthcare Acquirers in 2024

As we step into the dynamic landscape of 2024, the healthcare industry stands at the intersection of unprecedented opportunities and complex challenges within the realm of mergers and acquisitions. As a healthcare regulatory and M&A attorney, I think a lot of the momentum this year can be related to regulatory changes and the lingering business impact of the COVID-19 pandemic, fueling the need for deals as businesses refocus and divest non-core businesses.

And while many healthcare consultants and attorneys expect 2024 to be just as busy of a year in healthcare M&A, this year’s deal drivers will inevitably shift. PE sponsors will likely take some time to focus on refining and growing existing platforms. And as deals shift toward the middle market as mega deals prove more challenging, strategic acquirers will find new M&A opportunity in the year ahead, despite ongoing headwinds.

Let’s take a look at what’s going to be hot and maybe not due to regulatory challenges.

2024 Opportunity #1: Smaller Acquisitions

The landscape of M&A is ever evolving and 2024 is no exception. This constant change brings its own set of unique challenges and opportunities.

While smaller acquisitions can prove as challenging as large deals due to the lack of formal policies and processes, they also present a true opportunity to bolster the performance of lagging platforms and expand market presence.

One particular area that’s very hot for corporate acquirers are transactions involving small hospitals and health systems. While there’s been a surge in high-profile health system M&A, smaller systems are seeing a lot of activity. Whether it’s regulatory difficulty merging large systems, or small systems looking for support and camaraderie dealing with the operational challenges like COVID, staffing, regulatory or reimbursement changes, small systems are merging.

Additionally, smaller transactions encounter fewer barriers concerning regulatory approvals, a significant advantage given the changing laws attempting to restrict unchecked private equity  investments. Several states have begun to enforce or try to enact laws that mandate regulatory approvals for transactions exceeding specific thresholds making smaller deals easier to execute on.

2024 Opportunity #2: Selling Off Assets Ancillary to a Primary Focus

In pursuit of acquisition targets, strategics often encounter businesses that are ancillary to their core focus. It’s rare to find the perfect acquisition target that’s 100% aligned with the purchaser’s business model, and the same rings true within healthcare.

While it’s tempting to catch one’s breath after a transaction and allow for gradual assimilation, it’s important to maintain a critical eye on the performance of acquired assets.  Purchasers should implement a quarterly assessment of acquired assets to determine if misalignment or performance issues warrant change. This is especially true if the acquisition involves services outside of the core business.

These ancillary lines of business might not align seamlessly, creating challenges post-acquisition. Consequently, sellers might divest these businesses after the deal, or buyers may tolerate these challenges as a concession.

In the evolving landscape of business acquisitions, the recognition that perfection in alignment is rare holds true, especially in the healthcare sector. Companies frequently are faced with ancillary business lines that do not seamlessly integrate with their primary focus. As we navigate the complexities of healthcare transactions in the coming year, consideration of divesting ancillary assets emerges as a key avenue for organizations to enhance their strategic positioning and drive sustained success.

2024: Challenge #1: Expensive Dry Powder

Not only are smaller healthcare organizations merging for regulatory purposes, but also due to the high cost to purchase and difficulty securing dry powder.

Rising interest rates also pose an extra challenge for organizations dealing with limited resources, making larger transactions impractical.

To adapt, there’s a shift towards aligning growth investments with existing resources rather than relying on financing for acquisitions. This approach reduces the immediate pressure for proven performance. Moreover, the expansion into new markets or product/service lines has slowed due to the substantial resources required. Instead, the focus is on quick turnaround opportunities, where established health systems leverage their operational efficiencies to enhance the financial and operational performance of underperforming acquisition targets. Also integrating smaller, high-performing entities into existing platforms is considered to minimize operational expenses associated with large-scale acquisitions.

2024: Challenge #2: Regulation

Many new or renewed regulations create true challenges for completing deals or increase barriers to efficient innovation. Many states are moving in the direction of requiring regulatory disclosures or even approvals for specified categories of business transactions. The impact of these regulations, many of which are continuing to evolve, are significant as the processes are burdensome, lengthy and require the disclosure of extensive confidential information. In addition, regulators are ramping up enforcement, with many recent cases reflecting a willingness and focus on penalizing the PE Sponsors who are actively involved in the enforcement target’s management and operations.

All that said, the challenges facing the industry can be navigated and, in many instances, provide opportunities for strategic buyers. Keeping abreast of current M&A trends and implementing thoughtful strategies to navigate regulatory developments can achieve a successful transaction next year.

For now, corporate acquirers should consider embracing smaller acquisitions, divesting ancillary assets and adapting to expensive dry powder as they formulate their 2024 dealmaking strategies.

Kathleen Premo is a highly skilled legal and strategic advisor with over 20 years of experience in the healthcare and business sectors. As the leader of Epstein Becker Green’s General Counsel Services group and a sophisticated M&A deal strategist, Kathleen applies her business-forward approach to assist a diverse range of clients, including private equity sponsors, hospital systems, telehealth innovators, and specialty medical groups.

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