Merger and acquisition activity in 2022 can be described in two phases. The first half of the year was characterized by continued growth from 2021, and the second half of the year was characterized by an economic slowdown. The inflection point occurred on June 16, 2022, when the Federal Reserve began the first of the four 75 basis point interest rate hikes. Nevertheless, the healthcare services’ M&A activity stood out for its resilience. Despite a 36% year-over-year decrease in volume for M&A transactions, when aggregated for all subindustries the value for healthcare services’ M&A increased by approximately 5%, VMG Health notes in a new report.
Payer-provider convergence and nontraditional buyers continued to make headlines with Amazon’s acquisition of One Medical, CVS’s acquisition of Signify Health, and Optum’s acquisition of LHC. Looking ahead to 2023, VMG Health expects dealmaking to heat up due to three persistent factors:
First, plentiful levels of corporate cash and private equity (PE) dry powder persist. Corporate growth theses have not changed and small and midsize deals will remain integral to 2023 strategies. Additionally, the average PE fund size has increased approximately 35.0% from 2021. Strategic companies with strong balance sheets and PE firms with undeployed capital will take advantage of liquidity premiums in the M&A market.
Second, higher interest rates may impact deal structures. Small and early-stage companies have looked toward acquisitions requiring less upfront cash. To achieve valuation targets, a higher percentage of consideration is being pushed into earn-out structures, incentive equity, or promissory notes.
Third, divestitures may play a larger role in value creation through 2023. Corporations seeking to achieve growth and shareholder return objectives may look to portfolio optimization as a growth strategy. Read more.
