ESOPs for Healthcare & Insurance

Daily, the sale or merger of a company involved in a service industry grabs the headlines.  Whether a service provider to the healthcare, insurance or other industry, it feels like all companies and industries are in “play”.  The announcements of these sales or mergers are normally accompanied with assurances from management that the ownership change will not adversely affect employees or the level of service to customers.  Regardless how strong the promise, the fear associated with change is unsettling for many.  So while the pace of mergers and acquisitions (M&A) continues to increase, business owners in all industries must continue to keep a watchful eye and consider all options for succession of ownership, both external and internal.  One interesting option, which we’ll discuss further, may be the sale to an Employee Stock Ownership Plan (ESOP).

Recent Activity in the Healthcare & Insurance Industries

The PCE Industry Report – Healthcare reported transaction volume through the halfway mark of 2015 softened slightly on a rolling twelve month basis with 1,348 transactions compared to 1,412 at the same point in 2014.  Despite the decline, this level of activity greatly exceeds the volume of transactions seen historically, as the current rate of M&A is more than twice the annual pace seen as recently as 2011 & 2012.

Healthcare Services and E-health Technology sectors continue to lead the industry recording the highest number of transactions.  Concerns that the industry’s M&A transaction activity was trending softer have now been alleviated following robust activity and blockbuster deals announced in July and August.  Consolidation of physician practices continue to grab local and national headlines.  In August, national headlines covered the $1.6 billion deal announcement that the national physician group practice, IPC Healthcare (NASDAQ: IPCM), would be acquired by Team Health Holdings (NYSE: TMH).  On a local level, small physician practices continue to consolidate or merge principally into local hospital based systems or into one of the nationally focused specialty practice consolidators.

Another Healthcare Service sector merger dominating headlines was the August 25 announcement by Cardinal Health (NYSE: CAH) that they would pay the private equity group, Walsh, Carson, Anderson & Stowe, $290 million for a 71% ownership stock in the post-acute care coordinator, NaviHealth.  The transaction will give the medical products distributor immediate mass and the strategic benefits of being an early leader in this rapidly developing service area.

The M&A consolidation trends seen in the healthcare industry can also be observed in other industries.  The insurance industry’s leading investment management company, Conning, recently released its study on insurance industry’s M&A trends. The total value of global transactions that involved property/casualty, life/annuity and health/managed care insurance companies jumped 44% in 2014, compared with the previous year according to the Conning study.  When adding agency and distribution insurance service companies into the calculation, the total volume of insurance M&A grew 51%.  The recently announced mega mergers between Aetna-Humana, Anthem-Cigna and Ace-Chubb all suggest the M&A trends within the insurance industry may continue well into 2016.

Opportunities and Options Abound – Consider Carefully

Whether you are the owner of a company providing services to healthcare, insurance or another industry, corporate consolidation and merger opportunities abound.  News Articles regarding competitors and peers changing ownership usually highlight the business advantages the M&A transaction will bring to the acquired company and the clients they serve.  In some cases, the sale may provide new capital to fund growth.  In others, the merger opens up or expands the opportunity to provide enhanced services to existing or new customers and allows the merged companies to consolidate operations resulting in lower operating costs.   New ownership and consolidated merged operations will often improve the future of a company.  However, some owners find that selling to another company is not the preferred succession alternative.  The sale to a third party may provide your company with strategic advantages, but it may not allow for the culture you have defined over the years to endure past the sale.

If you are the owner of a service company, it is worth reflecting on M&A trends and strategies occurring in your industry.  Equally important is to research alternatives, such as a sale to an ESOP.  ESOPs provide tax advantages to selling shareholders as well as the company, while providing the owner the ability to direct and guide the legacy of his/her business.  Read ESOP is the Answer for additional insights into the powerful benefits ESOPs can provide.  In order to properly assess alternatives, business owners should consider running an investment banking sale process targeted to third party buyers, while at the same time conducting a company specific ESOP feasibility study. As consolidation in the healthcare and insurance industries continue to accelerate with M&A opportunities, business owners must keep sight of their goals and diligently research all options in order to execute the most beneficial transaction.

If you have comments or questions about this article, or would like more information on this subject matter, please contact us.
David Jasmund

Investment Banking
Orlando Office

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