Adrian Lamasz – Head of Regional M&A and Transaction Solutions at Aon sees plenty of opportunity for mergers and acquisitions (M&A) in the sector, but reinforces the need to get the due diligence right, particularly when looking at risks surrounding digital and people.
From a mergers and acquisitions perspective, the health and social care market is buoyant. Deal activity looks set to grow, not least for businesses involved in the delivery of specialist medical services. With an infrastructure capital asset class now adding health and social care alongside its more traditional targets, together with a perception that health and social care services will be transformed in the next five to ten years given the growth in medical technology, there are likely to be increased opportunities for businesses to buy and sell. Critical to realising deal value however, is in getting the due diligence right particularly when related to digital and people risks.
The Growing Role of Infrastructure Capital
Infrastructure capital has traditionally focused on heavy infrastructure such as roads, railways and airports, but with plenty of capital to play with, investors are looking for other sectors that can provide similar returns. Health and social care delivers the predictable revenue flow that investors like to see, while there is a usually a hard asset – property – that sits behind the business offering additional security.
Specialist health services in areas like mental health – where the care institute is getting a higher revenue to deal with a more specialised area of care – are also an attractive target from an infrastructure perspective. Infrastructure capital will however, be looking for businesses with earnings in excess of £10 million, which means many organisations will be working towards ‘buy and build’ type arrangements to achieve the scale necessary to make themselves infrastructure capital ready and create a worthwhile additional return.
Digital Due Diligence
Much of this future investment is likely to be driven around the use of medical technology – or medtech – in the sector, and particularly its use in helping to reduce hospital waiting lists. In the last few years, one of the principal reasons for businesses buying other businesses has been to get access to the target company’s technological platform which is where the importance of deal due diligence on digital risk becomes so critical.
Healthcare can be critical national infrastructure, so buyers need to make sure that whatever is being plugged into the NHS mainframe system is robust from a cyber security perspective. But it’s also critical that the buyer is sure the tech platform is worth the price tag. To help deliver that accurate price assessment, Aon uses experts to evaluate the digital platform of a target, check it is robust, scalable and that it doesn’t include software or code that belongs to someone else’s intellectual property, while also profiling the technical team that supports the technology and understanding how ‘key’ they are and the costs associated if replacements are needed.
The aim of this digital due diligence is to validate the assessment made of the technology which can reveal that either it is worth the price being paid, or identify that a lot of work needs to be done to make the platform more robust. The findings might mean walking away from a potentially bad investment, or taking a trip back to the negotiating table and revisiting the price.
Understanding the People Risk
While digital due diligence is key, so is the process of understanding the people risk within a business. Take a care home business Aon was asked to perform due diligence on, which had an employment practices liability (EPL) insurance covering potential disputes with employees over working conditions. The business was spending £100,0000 a year on the policy with many active claims, which tells a story that the workforce was not happy. Another business Aon carried out due diligence on, was very similar in profile but had no EPL and no employee claims identified in the business, with a strong relationship between its workforce and leadership. Unsurprisingly the latter was an extremely successful investment.
Much of the value of an organisation sits within the workforce, which is why looking at ways of assessing ways to help with retention for businesses newly acquired are also key. Again, this could mean bringing in experts to look at areas like employee benefits and how an existing programme helps retention of key employees.
Tell a Great Story
Get the due diligence right and risk in these key areas can be minimised and, together with a similarly forensic approach to areas like governance, operations and de-risking hotspot areas such as medical malpractice, the chances of getting a good, long-term deal improve. Of course, due diligence works both ways and if businesses looking to sell can tell a great story, then the higher quality the asset, the greater the return.
To find out more about how Aon’s Mergers & Acquisitions team can help you whether you’re an investor, or a business in the health and social care sector looking to buy or sell, contact Adrian Lamasz ([email protected]), or Sarah Triggs ([email protected]) UK Health and Social Care Industry Leader.
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This article has been compiled using information available to us up to 05/04/2023.
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