When M&As Go Wrong

Considering a merger? Make sure the prospective partner's financial liabilities and operational challenges are apparent by the time the due diligence phase is completed.

When providers identify a potential M&A candidate and perform due diligence, there are no guarantees that a formal agreement will be concluded. In fact, there are a number of financial and operational ways that a potential deal can be derailed.

According to the 2018 HealthLeaders Media Mergers, Acquisitions, and Partnerships Survey, respondents report that the top three financial reasons an M&A involving their organization was abandoned before or during the due diligence phase are concerns about assumption of liabilities (21%), costs to support the transaction were too high (19%), and concerns about price (19%).

Note that the full extent of a prospective organization’s financial liabilities may not be apparent until the due diligence phase is completed, which may explain why this aspect plays a major role as a deal breaker.

Operational challenges

Respondents say that the top three operational reasons that an M&A involving their organization was abandoned before or during the due diligence phase are incompatible cultures (30%), concerns about governance (24%), and concerns about the operational transition plan (21%).

Interestingly, based on net patient revenue, a greater share of large organizations (47%) than small (25%) and medium (17%) organizations mention incompatible cultures, an indication of some of the challenges providers face when integrating large organizations with disparate cultures.

Pamela Stoyanoff, MBA, CPA, FACHE, executive vice president, chief operating officer at Methodist Health System, a Dallas-based nonprofit integrated healthcare network with 10 hospitals and 28 family health centers, says that organizational culture exists both at the senior leadership level as well as throughout an organization, and problems can arise because sometimes they can be different.

“You have two senior leadership teams sitting in a room trying to agree on deal points and reach a philosophical agreement. Oftentimes, you have cultural compatibility at the senior level (those who are consummating the deal) but find that culture throughout the remaining levels of the organization is not as conducive to a merger. That is something you don't necessarily see until later, after the deal is done,” she says.