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4 Common Steps in Beginning Hospital M&A Discussions

When one looks at the healthcare market, it is clear that merger and acquisition activity among hospitals is high. However, for many hospitals considering some form of a transaction, a merger or acquisition may be a relatively foreign strategy to pursue. This is particularly true for smaller, community hospitals.

In order to shed some light on the process, here are four common steps that comprise the beginning of potential transaction discussions.

Step 1: Strategic concept starts with CEOs. According to Doug Fenstermaker, managing director and vice president of healthcare for Warbird Consulting, when hospitals or health systems begin discussions about a potential merger or acquisition, the conversation most likely starts between the CEOs of the organizations.

"I've been involved with two [merger deals] in my career. In both cases, the concept for integration started with the CEOs," says Mr. Fenstermaker. "The CEOs got together for lunch to talk about reasons to link together. Frequently, they will then write the strategic overture together."

While this may not always be the case, the CEO of the hospital is most likely going to have some involvement in the initial idea to pursue a transaction.  

Step 2: Involve leadership within board of directors. Assuming the CEOs of the organizations agree to explore an integration, the next step toward a merger or acquisition is to involve the leadership of the board of directors — the chairman of the board and the chairman of the board's finance committee, according to Mr. Fenstermaker.

"[These individuals] create an ad hoc group to discuss the potential transaction. It is all very private and quiet because the discussion could create a lot of havoc among employees, especially if it goes nowhere," says Mr. Fenstermaker. "I've been part of deals that fell apart based on personalities within the boards."

Since very little is certain in the beginning of hospital transaction deals, it is important to keep the discussions to only the individuals with the most relevance and influence. As discussions move toward negotiations, additional players are included.

Step 3: Involve more executive leadership. The next step is where the entire board of directors and other hospital executives are included. "Step three is getting more serious. The whole process begins to take on a life of its own," says Mr. Fenstermaker.

The senior management team — the CFO, COO, president of the medical staff, etc. — are brought into the group. "While the group gets larger, everyone is still under a confidentiality agreement," says Mr. Fenstermaker.

Step 4: Involve the lawyers. The fourth and final step in the early stages of the M&A process is to involve lawyers from each organization because the lawyers need to discuss the legal logistics of the potential deal.

"The general counsels on both sides get involved. They will appoint a joint task force with executives from both sides to work with attorneys to begin putting legal documents together. From there a letter of intent is written, due diligence begins and both sides find out the plausibility of a deal coming to a conclusion," says Mr. Fenstermaker.

Negotiating a merger or acquisition is a complicated process that can involve many of steps. The above are far from all inclusive but may help to begin the process.

More Articles on Hospital Mergers & Acquisitions:

20 Best Practices for Healthcare Mergers & Acquisitions
9 Strategies for Robust Healthcare Due Diligence
4 Transaction Process Objectives Help Hospitals Select the Right Partner

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