The Institute of Mergers, Acquisitions, and Alliances (IMAA) says there have been 126,000 M&A transactions in the last 34 years (yes, they counted). They say that 6,804 or 5.4% have taken place in the healthcare industry (we counted those). And if you accept the law of averages as calculated by the folks at The Harvard Business Review, as many as 9 out of 10 are failures.
A .100 hitter in baseball would be sitting on the bench in the minors. Score one of ten on your final exam and you’d be kicked out of school. Heck, even the TV weatherman has a better average for getting it right.
So what is it that healthcare executives (and just about every CEO in every industry) continue to get wrong? Some blame culture rejection, unrealized synergies, the inability to operate as one system, improper valuations, or the cost of integration itself.
We blame IT, or more specifically, those CEOs who refuse to give the technology people a seat at the M&A table.
For years, we’ve worked with health system executives across America as they attempt to pick up the pieces from a failed, or shall we say “less than financially successful” merger or acquisition. In almost every case, the acquirer didn’t make a thorough assessment of the acquiree’s technology infrastructure. VertitechIT CEO Michael Feld and Executive Vice President Mike Machulsky have experienced the M&A game from both sides of the table.
Question: When we say that 70%-90% of healthcare mergers in the last 30 years have fallen short of revenue goals, that doesn’t surprise you?
Michael Feld: No. I would be surprised if it wasn’t 100%. Healthcare is a heavily siloed, heavily parochial industry. They don’t take an approach where they look at the goals of a healthcare system as an overall goal where everyone goes and has a little part in it. What you really have is a nebulous set of goals because they don’t connect those to the internal requirements.
Mike Machulsky: When you’re talking inorganic growth through M&A, you have to pay attention to some of the backend details. One of the details that are quite often overlooked is proper due diligence on infrastructure, on information technology capabilities, and just really understanding the overall health and hygiene of an acquisition target in those areas.
Feld: Half the time IT isn’t even at the table at the beginning of an M&A conversation when in reality, IT is a horizontal slice of every part of the hospital. It may only be 3%-7% of the gross or the scale of the institution but it is a part of everything. It is a technological industry and yet technology isn’t really discussed.
Machulsky: We wonder sometimes why questions like “how is a hospital managing their infrastructure, how are they managing their data, how are they supporting end-user experience both from clinician and patient perspective” aren’t being asked up front. Starting in those three areas and having a really good way to integrate it, is what some organizations quite frankly miss because they’re enamored with other dynamics of the deal.
Q: Do other tech industries “get it?”
Machulsky: If Amazon were to be acquiring a healthcare company, I would be shocked if they didn’t do an exhaustive due diligence on how to pull their systems into all of their cloud-based systems. That’s a different level of scrutiny because technology is in their DNA. The fact is, a hospital system just doesn’t understand that they’re in the business of technology.
Feld: In too many of the M&As I’ve seen, the IT department just gets an order saying, “We’ve just bought hospital ‘x’ please make it work.”
Q: We found that between 2012 and 2016, only a third of hospitals acquired, successfully switched to the dominant health institution’s EHR platform. That would seem like a no brainer.
Feld: With the hospital board or the entity that drives the potential of a merger or acquisition, the first thing that should happen is “okay, lets divide this up into our major domains. The operations, clinical, finance, technology…” I don’t often see technology being brought in until well into this discussion. By that time financial assumptions and risks and other things have been set.
Q: So if VertitechIT clients bring you in for advice pre-M&A, what do you say?
Machulsky: Put the CIO at the table next to the accountants, clinicians, and administrative folks. Then start looking at everything running the gamut from cloud technology to end-user interface, the structure of the back-end data centers, and the wide area networks. Everything needs to work out. The HIMSS Analytics INFRAM survey can be a good starting point in putting together a key set of criteria that can be measured and benchmarked.
Feld: The first due diligence tasks of IT are to analyze what both sides have and then accurately represent it. Then you have to quantify it. You’re going to have to say “Okay, we have a better data center but you have better servers. We have better x but they may have a better y.” So you’re going to have to kind of know up front that there are certain areas that once you get into the actual migration or consolidation, you will have made many of these decisions as to who does what and on which side… up front. You should never refer to the old, “we’ll figure out as we go along.” That’s really a recipe for disaster.
The statistics would suggest that M&A all-stars are like great athletes, that is, they pay attention to the details. Great leaders surround themselves with all the experts that can make for great outcomes.