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What Are Healthcare Mergers and Acquisitions?

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  • Written By: Geri Terzo
  • Edited By: PJP Schroeder
  • Last Modified Date: 16 September 2016
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Companies in the healthcare industry need to continue to grow in order to stay competitive and increase revenues and profits. The two primary ways that a company in this industry can grow is by expanding its business organically, which is a focus on internal growth, or via healthcare mergers and acquisitions. Healthcare mergers and acquisitions are transactions in which one larger entity buys a smaller company, or two companies of equal or similar size combine to enhance an industry position. Different types of healthcare businesses can participate in consolidation, including pharmaceutical companies, hospitals, and medical device makers.

Healthcare is a capital-intensive business. The requirements for access to capital, or money, are great. Creating drugs and putting those medicines through layers of clinical trials before obtaining federal approval to sell those items requires large amounts of time and investment.

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When drug makers are hurting for cash and may not have the necessary assets in order to continue drug development, they might become a target for healthcare mergers and acquisitions. Worse, if a company fails in clinical trials for drug development, this could put the corporation in a distressed state where it needs financial help just to continue business operations. Distressed opportunities can be a driver for healthcare mergers and acquisitions because, in these deals, a buyer is often able to purchase the target company at a discount, considering the target company is worth saving. The financial backing of the buyer coupled with access to the target company's products or valuable patents could lead to a successful future for the combined entity.

Consolidation among hospitals is another way healthcare mergers and acquisitions occur. Regional legislation tied to healthcare can largely influence the amount of revenues that a hospital earns and the way that those funds are earned, such as via insurance companies or patients themselves. As a result, healthcare laws can be a huge driver of hospital consolidation. When two hospitals merge, it does not necessarily lead to layoffs, although management typically uses a major event such as a merger to eliminate redundancies and streamline areas and departments that can be more effective.

Healthcare mergers and acquisitions are not always accomplished by strategic deals with two companies that have similar and competing business lines. Private equity firms are financing entities that purchase stakes in businesses or in entire companies that are in need of equity financing. The private equity firm typically participates in improving on the business operations of its purchase. Once those improvements are evident, the finance firm attempts to sell those assets or the company to another buyer. Or, the private equity firm helps the healthcare business to begin selling shares in the public markets in an initial public offering (IPO).

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