Thursday, July 24, 2014

Information, Non-Manipulative Selling and the Role of the Mergers and Acquisitions Intermediary?

In considering this question, the first thought that comes to mind, is a story my first boss shared with me early in my career. He asked: "Did you ever hear of the woman who remained a virgin despite being married three times? Well, the first husband she married was for money and he was too old to do anything. Her second husband was asexual and was not interested at all. Her third husband was a business broker, who just kept telling her how good it was going to be."

The biggest offense of brokers or intermediaries is they over-promise and under-deliver. Why do they over-promise? The answer is simple: to secure the engagement by projecting inflated valuations, that is, selling the sizzle without regard to the steak. The strategy is to get the potential client whipped up dreaming of sipping Polynesian cocktails on a beach, so that their next question is "where do I sign?" Call me old-school, but in my book this is classic manipulation. I believe in selling and promoting my services and strengths vigorously but our approach is based on the facts. I let the information speak for itself and collect and disclose all the data necessary and wanted, to inform the process and the participants. I call our approach "Non-Manipulative Selling,” whether we apply this to potential clients or to potential buyers in one of our sales processes.

Recently I heard a broker in this sector talk about "Pushing the Agenda," concerning his approach to valuation and to the healthcare mergers and acquisitions sales process. Truthfully, I never heard this term before. I had to Google it to learn its meaning. Apparently, "pushing the agenda," means to promote something vigorously, including, as expedient, garbling the facts and contorting the sale process to "jam" interested parties. It is an "in your face" by any means necessary approach. One definition for pushing the agenda I found was "forcing your opinion or your plan." The thinking is by "jamming" the prospective buyers into a compressed sales process and by not disclosing all the facts, buyers are "ju jitsu-ed" into committing to a higher than expected offer price. “Animal Spirits” will carry the day. As a result, the humdrum role of compiling thorough information to enable reasoned and thought-out (not instant) analysis and evaluation is secondary and perfunctory. Why let facts get in the way of sales maneuvers?

Maybe because I started my career doing the scut work of researching, collecting and crunching the numbers, that I contend the "pushing the agenda" approach is fraught with potential problems. First, my approach is to collect as much historical and current information on a healthcare facility's or company's performance, characteristics and results. I respect and admire clients, buyers and decision-makers. I want to help them arrive at a good decision and thank me years later because of how well the deal turned out. I think that decision-makers are rational economic actors and as such, seek to understand and evaluate the business for sale at a very deep level to justify the acquisition strategy and the purchase price. Comprehensive analysis involves modeling of pro formas under various operating scenarios, criteria and conditions. Without reliable information, this analysis cannot be conducted and good decisions cannot be realized.

I know the maxim "of being lucky, rather than smart," but relying on luck instead of information to justify a multimillion business decision, is reckless and dangerous. I understand that ultimately buyers cannot possess absolute certainty when considering a potential acquisition. There are always risks and uncertainties. Indeed, they do have to bite the bullet and make a bold decision. But our job, as intermediaries, is to ensure that the decision-makers, that is, the buyers, are provided with a thorough data base and to have sufficient time to review the materials and ask questions, so they can fully discern the current conditions and trends and to measure the risks versus the rewards. Simply put, to make an educated and non-forced judgement.

Second, in the sale of healthcare businesses, there is a practice known as "re-trading" by which a buyer: (1) purports to agree to a price; and (2) then seeks to reduce the price during the "due diligence" period by purporting to discover information concerning the business that allegedly reduces its value. As a result, a seller and their intermediary that does not provide accurate financial statements before accepting a buyer's bid is acutely vulnerable to re-trading. They are setting themselves up for a re-trade.  Moreover, if the seller has signed an agreement requiring it to negotiate exclusively with the buyer, then the buyer has more leverage in re-trade negotiations. Under such circumstances, re-trading can result in a reduction of more than 30% of the original sale price. Again, to avoid re-trading, the seller's intermediary must collect and disclose as much accurate information as possible to potential buyers and allow them sufficient time (not "jam them”) to analyze and evaluate it.   If all the information is made available at the outset of the sales process, then trumped-up claims of not knowing an important kernel of information, are rendered false and inappropriate.

Knowledge is power and as intermediaries we should empower clients and buyers to make better decisions and choices. In a world where information access is cheap and instantaneous, failure to collect and disclose all the facts “to push an agenda” is clear manipulation and downright anachronistic.

Wednesday, July 23, 2014

Healthcare Mergers and Acquisitions Jargon, Part 2

• “Bandwidth” – buyer has ability to review and evaluate multiple deals

• Indemnity – What seller has to provide to stand behind statements represented and warranted in a sale contract

• MAC Provision – part of purchase contract that deals with material adverse events before closing

• “CHOW” – In healthcare industry, there is typically a licensure or change of ownership application process.

• Pro Forma – Financial Model of Projected Revenues and Expenses, incorporating buyer’s operating assumptions and plans often testing multiple scenarios.

• TLM – Trailing Twelve Months of Financial and Statistical Data

• Re-Trade –Buyer’s Renegotiating Purchase Price Reduction After Agreeing to Purchase at a Higher Price Buyer Signs Deal That They Don’t Intend to Honor. Bait and Switch

• Earn-Out - An arrangement in which sellers receives additional future payment, usually based on future earnings.

Tuesday, July 1, 2014

Healthcare Mergers and Acquisitions Jargon, Part 1



• Middle-Market – Transactions generally under $1 billion and involve non-publicly-traded companies.

• One-Off Deal – Purchase of a single facility or entity, not a multiple entity deal

• Portfolio Deal – Multiple facility or service sale

• “Deal Has Hair” – a complexities and complications of selling company

• ‘’Tuck-in’’ Deal – small niche deal that fills hole in company’s portfolio

• “The Ask” – A term or condition of the business deal that one side is requested

• "Open Up the Kimono” – seller is willing to disclose confidential company information

• Data Room – online virtual cloud where confidential due diligence is stored

• “Cratered” – as in the deal crated…fell apart