Cross-Shore M&A in the Healthcare Sector: Can You Make It Work Well? | Sherpas in Blue Shirts
On September 5, 2011, the Business Standard (one of the leading Indian business dailies) reported that offshore BPO player Firstsource was planning to sell U.S.-based MedAssist, a healthcare revenue cycle management-focused BPO provider it acquired in 2007 for US$330 million, at a reported premium valuation of more than 12x EBITDA. The idea behind the acquisition was to merge the payer business (Firstsource had multiple Fortune 100 health insurance clients) and the provider business (MedAssist’s main business) into one comprehensive organization.
In 2005, Apollo Health Street, formed in 1999 by Apollo Hospitals Enterprises, acquired U.S.-based BPO provider Zavata (a revenue cycle management firm) for US$170 million. According to the Financial Chronicle, some of Zavata’s key clients jumped ship after the acquisition. There have also been reports that Apollo Hospitals wants to exit non-core businesses including the BPO business. Apollo Hospitals tried to IPO Apollo Health Street in 2008, but the global economic crisis put an end to that.
The two above cases have several factors in common:
- The acquisitions were focused on entering/building on the emerging healthcare services space
- The acquisitions occurred in the heady days before the 2008 financial crisis, the onset of which likely contributed to derailing business growth plans to some extent
- Client access was one of the value drivers behind the acquisitions that perhaps didn’t work out as well as was envisioned
So why is it difficult for offshore BPO providers to make acquisitions successful in the onshore healthcare space? There are certain services that simply don’t lend themselves to offshore delivery. Additionally, many healthcare industry-unique issues that relate to the execution and integration of acquired companies exist.
Think about some of these challenges:
- Healthcare domain knowledge – in the examples above, the targets were onshore-based players with domain skills that were stronger than the acquirer. With that, the agenda was perhaps being driven by the target rather than the acquirer, which could have led to difficulties in driving synergies and adding value
- Fragmented market – most healthcare-focused onshore BPOs are small players with limited scale, especially those serving the provider market. As the clients are not overly dependent on these suppliers, it makes it hard to leverage client access for cross-selling opportunities. (Note, the largest hospital chain in the United States is HCA with revenues of US$33 billion, while the rest are much smaller. For example, the third largest, HealthSouth, is 15 times smaller than HCA.)
- Buyer preferences – Hospital chains are very sensitive to protection of patient data and are uncomfortable having sensitive data taken offshore. Most prefer to work with small onshore players and already have deep relationships with them.
- Local understanding and social intimacy – Hospitals typically tend to build a networked community of people working around them. Most patients and service provider personnel are part of one large social network, making it difficult to take jobs offshore.
- Offshoreability – Healthcare has generally lagged other industries in terms of adopting outsourcing and offshoring. The above-mentioned factors have further contributed to this.
We believe offshore providers must take into account two key considerations before considering acquisition of an onshore business:
- Access to clients: Understand the target’s client base, i.e., multiple small clients that rely heavily on it, or a few large ones that only depend on it to some extent. This will help determine leverage, access, and cross-sell opportunities.
- Ownership of business/rationale for acquisition: If the acquirer is entering a new business, the agenda will be driven by the target company’s management due to the acquirer’s lack of familiarity with the territory.
These two factors, in addition to others, will help drive the buy or goodbye decision.
