Most conversations about strategy in health and human service organizations during the current crisis include some discussion of mergers and acquisitions (M&A)—and our 2020 OPEN MINDS Strategy & Innovation Institute was no exception. The drivers for considering M&A as a strategy? One is the cash flow impact caused by the increased cost of risk management and steep declines in revenue during the crisis. A second is the likely changes in the competitive landscape in the year ahead, including a combination of delivery system changes and pending budget cuts.
This was reinforced by our attendees at today’s 2020 OPEN MINDS I/DD Executive Summit. In a quick poll, 71% of provider organizations reported that their strategic plan has an agenda item for mergers, acquisitions, or affiliations. And, the primary reason those organizations are pursuing M&A? Thirty-three percent reported that it is to increase their service lines and become more comprehensive, while 29% reported that they are looking at M&A as a means to improve their financial situation.
The issue for all executive teams is whether they have the financial wherewithal to survive the crisis and the marketing horsepower to compete when it subsides. For many organizations, M&A is a strategy to increase the likelihood that this will happen.
But when it comes to M&A, one of the most common questions asked by executives is, “How big is big enough?” The short answer? There is no one right size, journey, or answer for every organization. It depends on a number of organization-specific factors and contextual aspects including location, current size, and service lines, among others. And in my closing keynote for the institute, Strategy In A Crisis – Staying Afloat Vs. Navigating: Keys To Planning & Managing For Recovery, I mentioned that the strategy questions are shifting from considering the organization as a whole to the key service line that the organization offers. To frame that question in terms of M&A, the issue is how big does a service line need to be to have competitive advantage and financial sustainability?
My colleague and OPEN MINDS Senior Associate, Ray Wolfe, took a deeper dive into the “long answer” with a panel of executives with great experience in M&A in two sessions, How Big Is Big Enough? Deciding When, How, Or If To Grow Your Organization and Mergers, Acquisitions & Affiliations Readiness: What Does It Take? Mr. Wolfe, along with Mike Lyons, senior vice president and general counsel of Mosaic; Cole Caruso, founder of Community Resource Network of Florida; and three executives from Hillsides—Garret Zabel, director of strategy and innovation; Amy Ley-Sanchez, chief clinical officer; and Joe Costa, president and chief executive officer—discussed their hands-on experience with M&A as specialty provider organizations serving vulnerable populations.
Mosaic consolidated and incorporated in 2003 and has continued growing through acquisitions ever since, including the 2018 acquisition of Soreo, a service that provides in-home supports to seniors and people with disabilities (see Vision, Mission & Values—The Mosaic Approach). And the Hillsides sustainability strategy is to be prepared for and take advantage of collaborations when the opportunity arises—they have participated in a range of affiliations, mergers, and partnerships, including their 2016 merger with Bienvenidos (see The Path To Long-Term Sustainability). Hillsides is also diversifying funding streams, evolving from solely the public space to gain more traction in the private space. Community Resource Network (CRN) of Florida, an organization serving consumers with intellectual and developmental disabilities (I/DD), was able to preserve and expand its mission after being acquired by a large strategic buyer, Versacare, that provided the infrastructure to expand their mission.
In both sessions, the speakers provided three key insights for specialty provider organizations to consider when evaluating an M&A strategy: identify the role that M&A will play in making your strategy successful; find the right partner to “fill the gap;” and realize that M&A is more than a simple transaction.
Answer the question “why”—For M&A to contribute to strategic success, proposed M&A transactions must have specific goals. Identifying those goals and how they relate to the organizational drivers for growth is key. Will the partnering organization expand your reach in a certain state or region? Will they help diversify service lines for new populations? Whatever the “it” is, identifying those key drivers (your reason why) is a critical step in the M&A process (see Are You Ready For A Merger Or Affiliation? How To Prepare Your Organization To Find The Right Partner).
Find the right partner to “fill the gap”—Once you have identified the “strategic impact” expected from M&A, find the “right” organization. In the discussion of their merger with Bienvenidos, Hillsides’ Ms. Ley-Sanchez noted, “The goal was to answer the question, how do we use M&A as a vehicle for growth?” They wanted a strong organization that could expand their current service offerings to include foster care and adoption. Mr. Costa explained that some of the key factors, in conjunction with the new service line, included the desire to develop a strong community presence and honor the Bienvenidos brand.
At CRN, Mr. Caruso focused on nurturing best practices in serving consumers with I/DD and building a strong organization. While he got several offers from buyers over the years, he waited until he connected with an organization whose mission aligned with his own. The acquisition helped CRN get financially stronger, expand services, hire more staff, reduce consumer wait lists, and advance its original mission.
Realize M&A is more than a simple transaction—While buy-in from senior leadership and the board is key, Mr. Lyons noted that M&A isn’t a simple transaction, but “a monumental shift.” He continued, “The decision to grow—and how—could be the biggest decision you make as an organization. It’s a balance of business and emotions.” The process doesn’t just impact those directly involved in the “transaction,” it also impacts staff and consumers (see Keeping Consumers In Mind As Mergers Happen), who will have a significant amount of anxiety about merging two entities. While it is exciting the merge, it is also important to strategically outline new policies, practices, and philosophies to ensure a seamless transition for all parties involved.
Another strategic question is when to consider M&A. “Not out of desperation,” says Mr. Lyons. Don’t wait until the organization is on the brink of collapse. Instead, consider the structure and partners you’ll need for long-term sustainability. And be prepared so you can negotiate from a position of strength. “We can’t let the safety net collapse and wait for someone else to come in and do what we are doing,” cautions Mr. Wolfe.
In the context of our current crisis, M&A isn’t the only solution and it doesn’t come without challenges. But when it’s done right, M&A can allow two organizations to operate more efficiently and effectively while preserving mission and expanding service coverage for vulnerable populations.
For more on M&A, check out these resources from The OPEN MINDS Industry Library:
- The OPEN MINDS Mergers, Acquisitions & Affiliations Summit: Best Practices For Non-Profit Health & Human Service Organizations
- Are You Ready For M&A?
- The Merger Blind Eye
- Making The ‘Merger’ Decision
- Coming To Grips With The Reality Of Mergers
- The Merger Of Retail With Health Plans—Strategy, Please
- Thinking Of A Merger Or Acquisition? Five Key Questions
- Succession Planning & The Merger Issue – Thoughts From Executives Who Have Been There
- Mergers As A Succession Planning Strategy
- Planning To Buy Another Organization?
And for even more on using M&A to reposition in the current crisis, join us on June 25 at 1:00 pm EDT for the web briefing, Using Mergers, Acquisitions & Affiliations To Address ‘Urgent’ Cashflow Needs, led by OPEN MINDS Senior Associate Ken Carr. The web briefing is offered as part of The OPEN MINDS Executive Blueprint For Crisis Management – Building Organizational Sustainability & Success In A Disrupted Health & Human Service Market, to help executive teams navigate the business, organizational, operational, and culture changes of a market in turbulence.