Every hospital merger has three critical components that board members and senior management need to consider, and which can provide a great analytic framework within which to evaluate options early in the process of consider a transaction. By no means are these three the most important in every transaction, but every hospital merger I’ve worked on required careful attention to, and a very clear understanding of, these components.
1. Structure: Transaction structure can seem a bit technical and legalistic, but understanding transaction structure is key to understanding core transaction dynamics – such as who will be financially responsible for long-term debt and where ownership of assets resides. Unless the transaction structure is thoroughly understood, misunderstandings about fundamental transaction features will occur. And this can have serious repercussions if key transaction features are incorrectly described to key stakeholders. In this regard, note that my use of the term “merger” in this post is not technical, and is short-hand for any dispositive transaction. Mis-describing an asset purchase transaction as a “merger” to a lender, for example, can result in a fundamental misunderstanding of how debt is meant to be treated; and delay closing.
2. Governance: Closely related to structure is the issue of governance – the structure of boards and incidents of control over specific functions. Governance is frequently a central negotiation point in a non-profit – non-profit hospital or health system merger because control, as opposed to economic ownership, is often the currency of such transactions. Generally, in non-profit – non-profit mergers governance discussions fall into the following categories:
- Maintenance of the existing board for a holdover period.
- Composition and control over election of the board.
- “Reserved” powers of the sponsor.
When proprietary hospitals acquire other hospitals, governance features are generally less of a concern; although this is not always the case. Many proprietary hospital groups attempt to retain the “community” orientation of a facility through the creation of non-fiduciary advisory boards or other structures that retain a fair amount of local input.
Governance discussions can also touch on extremely sensitive subjects, particularly when a hospital or health system has strong or expansive relations with the physician community or has a religious, government or educational institution affiliation.
3. Financial: Even when it is not about the money, it is about the money. Financial considerations are always a part of a hospital or health system merger. These fall into a number of categories:
- Purchase price: Many non-profit – non-profit transactions have no purchase price, but some do; and all proprietary hospital mergers do. This one may seem pretty obvious, but misunderstanding the derivation of a purchase price can cause headaches down the line. Make sure everyone knows the basis for the price.
- Post-closing capital commitments: Post-closing financial commitments are a common feature in hospital and health system transactions, even when a purchase price is being paid. Post-closing financial commitments are frequently tied to specific business plans or development projects, but not always. Enforcement is always tricky as well – particularly when the target is leaving the market. Frequently, the local governance board is given the mandate to enforce these commitments against the organization that elects them in the first place – not always an easy dynamic, particularly when there is a lack of trust.
- Funding the financial commitment: Purchase prices are generally paid in cash at closing. A seller may have some concern and seek comfort, particularly when the purchase price is to be financed. But a deal won’t close without the purchase being paid while it will close without post-closing commitments paid.
Regardless of the financial matters, understanding the details is critical to achieving an organization’s goals.
The foregoing items are critical items to any merger a board and management team must understand when heading into a merger transaction. One post cannot do them justice – and I am sure more could be added – but recognizing they are there is the first step in addressing them appropriately.