Despite COVID-19, less dramatic decline in Q2 M&A than expected, Kaufman Hall reports

Mergers and acquisitions deals consolidation
Kaufman Hall officials said in their latest National Flash Report that deals in the second quarter declined in comparison to the same quarter a year earlier. However, they said, two "transformational" deals announced in June pushed the quarter to a far less dramatic decline in deal activity relative to the underlying performance measures in the sector. (Getty/Kritchanut)

While the COVID-19 pandemic has done a financial number on organizations across the healthcare industry, it did not stymie mergers and acquisition deals as much as anticipated, according to a new report.

Kaufman Hall officials said in their latest M&A report that deals in the second quarter declined in comparison to the same quarter a year earlier.

However, they said, two "transformational" deals announced in June pushed the quarter to a far less dramatic decline in deal activity relative to the underlying performance measures in the sector—and could even indicate deals will ramp up in the near future.

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"I don't think there could've been any sort of realistic expectations of what might've happened as a result of the pandemic," the report's author Anu Singh, managing director and leader of the mergers, acquisitions and partnerships practice, told Fierce Healthcare.

"I think there was a feeling that because of what this would do to financial performance and maybe the trajectory of the industry participants themselves, there was a thought this would perhaps significantly slow down transaction activity as well," Singh said. "And, as the quarter played out, there was not a significant ... drop in the level of activity."

Deals in the second quarter included Steward Health Care's acquisition by a group of affiliated physicians and Advocate Aurora Health proposed a merger with Beaumont Health. Lifespan and Care New England Health System in Rhode Island also resumed partnership talks.

"What we were, perhaps, a little surprised to see is there still was large scale transformational system partnership. There still was large portfolios of for-profit or hospital management companies looking to retool their portfolio," Singh said. "There still was a need for community hospitals to look upwards to find the benefits of larger health systems."

RELATED: Winners, losers in healthcare’s 2019 M&A deals

Overall, the report says, there were 14 deals in the second quarter, down from 19 deals in the same quarter a year earlier and down from 29 deals in the first quarter of 2020.

The report also found:

  • At more than $800 million, the second quarter had one of the highest figures for average size of seller by revenue ever recorded by Kaufman Hall. The historic high previous recorded in 2018 was $409 million.
  • Total transacted revenue for the quarter was just over $12 billion.
  • Nine of the 14 transactions were by for-profit hospital and health systems. None of the transactions in the last quarter were completed by academic medical centers or religiously affiliated health systems.

RELATED: Investors expect healthcare deals to grow in 2020, but coming elections could dampen investments

Impact of COVID-19

So what does the second quarter say about the potential future impact of the COVID-19 pandemic on deals? Singh wrote that while health systems paused their activities for a while, the pandemic may also have "strengthened their rationale" for partnering up in the first place.

Like leaders in many other sectors, healthcare leaders are reevaluating their business and may be examining their healthcare delivery models, Singh said.

The pandemic may have been a catalyst for more organizations to work together to serve patients, which could support reevaluation of the potential for future deals. As an example, Singh pointed in the report to Lifespan and Care New England, which had suspended talks for a potential deal in 2019 but restarted talks after the two systems began "working together in unprecedented ways," in response to the crisis.

Finally, for-profit health systems have continued to reshape their portfolios over the quarter, with six of the 14 transactions representing divestitures by major for-profit health systems including Community Health Systems, Quorum and HCA.

"For many organizations, it's going to serve as a reminder or a catalyst that there is safety in scale," Singh said. "There is safety in being part of a large system that has more deployable resources and maybe more capabilities to deal with situations like that."

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