By: Dexter Braff
In mergers and acquisitions, it’s not bad news that typically sends a sector down the rabbit hole. In fact, for some buyers, capitalizing on a market in turmoil is practically their investment thesis.
No, it’s uncertainty – risk that can’t be neatly quantified and modeled – that sends buyers scurrying for cover like a group of freshly coiffed, blue-haired ladies caught in a rain storm.
This even applies to the Masters of the Universe – those barons of private equity who appear to many as swashbuckling investors that eat risk for breakfast. They are masters, alright. But Masters in Risk Management: skilled in engineering the kind of returns you can get taking on risk – while pounding away at price and terms to squeeze much of it out.
So, what are we seeing in health care, a sector with enough unknown, unknowns to confuse even Donald Rumsfeld (look it up)?
Despite seven years of republican opposition and more than 50 congressional votes to repeal or derail health care reform, while Obama held the power of the veto and Clinton was a fait accompli, the real prospect of repeal and replace was as likely as Hillary ditching the pants suits.
But in November when the fait accompli wasn’t accompli-ed, there was more than enough risk in the air to turn the status from quo to who knows?
But here’s the thing.
Over the past eight months, as health care has teetered and totted, petered and clotted, we haven’t had a single deal exiled to the uncertainty zone. Nor, with isolated exceptions, have we seen buyers reconfigure or abandon their consolidation strategies.
The best examples of this incongruous behavior can be found in the Medicaid space.
Post-election – after Paul Ryan channeled the spirit of Ayn Rand to craft block grants (a reform initiative that, if implemented, will cap funding, reallocate spending, recalculate reimbursement, and raise the risk profile for providers dependent upon it from “uh oh” to “oh no”) – Bain Capital plunked down a billion dollars to acquire Epic Healthcare (a big player in Medicaid funded services).
And Bain wasn’t alone. We’ve seen major investments in this particularly unsettled space from other private equity sponsors as well.
So what gives?
We believe that buyers’ collective shrug comes down to three basic reasons:
- Despite all the tumult around reforming reform, given what appears to be the public’s new-found love for the principle elements of Obamacare, many buyers believe that when all the shrapnel has settled, instead of repeal and replace, we’ll wind up with repackage and reposition.
- Even if repeal and replace goes down, implementation will likely be phased in after the next cycle of mid-term and presidential elections to sidestep any negative political fall-out (a delay that provides more than enough time – and opportunity – for further critiquing and tweaking). Accordingly, many a buyer will be cautious to radically change their investment thesis now.
- Many consolidation strategies today are rooted more in the movement toward coordinated care and the alternative payment models that incentivize their implementation than they are on the expanded coverage provided by Obamacare. With expectations that, regardless of repeal and replace, these fundamental initiatives will remain in place, buyers have, and will continue, to stay the course.
In the end, when considering the implications of repeal and replace, Speaker Ryan may have turned to Ayn Rand for inspiration.
But buyers?
They’ve gone in a different direction.
Their spirit guide?
Alfred E. Newman.