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4 Transaction Process Objectives Help Hospitals Select the Right Partner

Due to changing conditions in the healthcare environment, many hospitals believe it is time that they move away from independence and toward some form of a transaction. A transaction has the potential to be an effective move in dealing with challenges in the industry. However, hospitals need to be well advised in approaching transactions, and finding the right partner is a crucial step.

In a recent webinar hosted by McGuireWoods, Geoffrey Cockrell, JD, partner at McGuireWoods, and Rex Burgdorfer, vice president at Juniper Advisory, discussed objectives a hospital board should have during a transaction process. These objectives will help guide the board toward the right partner.  

1. Allow decision making to evolve through the process. Ideally, a hospital board will allow the transaction decision making to be gradual and comparative. "We advise boards to simultaneously explore their options — all the strategies they can pursue and the range of partnership models they can undertake," said Mr. Burgdorfer. "With all the options hospitals have at their disposal, a common thing we hear is that boards feel overwhelmed by the obligation or duty to understand all their options. This can be an important and difficult time."

For this reason, the hospital board should refrain from finding only the best partner, but instead accept alternative proposals, refining objectives during the process instead of before.  

"It may be counterintuitive to folks on the board. They may think it is best to start the [transaction] process with a clear expectation of where the transaction will end. However, you can also make mistakes by starting a process zeroed in on one affiliation partner or one structural idea," said Mr. Cockrell.

While the hospital should be informed of its goals, that does not mean it has to find a partner that fits a pre-determined structure.

2. Create a competitive process. In order for a hospital to have a basis of comparison, it needs to create a competitive process and use that competition in its decision.

"The hallmark of good decision making is a basis of comparison. Competition helps a board evaluate transaction options outside of a vacuum — in an academic, hypothetical way. It helps them understand and learn from the market of companies they might work with," said Mr. Burgdorfer.

According to the webinar discussion, a competitive process will help accelerate the timetable to the selling or target hospital's advantage, maximize its negotiating leverage and help it evaluate alternatives on a relative and absolute basis.

3. Use competition as leverage to negotiate price and terms.
Competition is also beneficial in negotiating the best price and terms during a transaction, which is an important step in finding the right partner. According to Mr. Cockrell, there are various structures and types of considerations that have significant value implications. For instance, community hospitals associate considerable value to non-price matters (e.g., programmatic support, working capital, interim capital expenditures and commitment to services).

When a board allows competition in its transaction process, it may have more leverage with the potential partners to negotiate for a structure that allows for these non-price matters or a structure that has market value as well as value to the community.

For instance, competition during the process can help a selling hospital encourage an acquiring hospital to agree to softer issues that may be of particular importance to the community. The competition will help the hospital find the partner that appreciates and agrees with the soft issues.

4. Manage confidentiality. One of the most important objectives for a board is to manage the confidentiality of transaction discussions. According to the webinar, the board — and the hospital — will benefit from a broader search, which it will have time for under confidentiality. When there is a risk of a confidentiality breach, a broader consideration of partners is not as feasible.

According to Mr. Burgdorfer, a strong confidentiality agreement is important for the following reasons as well:

• To protect sensitive information from competitors.
• To preserve management focus on business.
• To manage employer perceptions.
• To avoid erosion of admissions by physicians.
• To avoid third-party interference with the transaction (e.g., state agencies, competitors, payors and unions).

"A transaction may be a decision made once over a 100-year life cycle that involves hundreds of millions of dollars of community value," said Mr. Burgdorfer. Risking the confidentiality could jeopardize the whole deal.

The partner selection is just one piece of a transaction process. While the structure, governance and terms are important, when the partner is not right, the rest of the deal could suffer. For this reason, when a board follows the above four objectives, it may find itself in a position with more partnership options — even ones it would never have expected — and more leverage to negotiate the best deal possible.

More Articles on Hospital Transactions:

10 Necessary Points for a Due Diligence Checklist
Hospital CEO Shares Best Practices From a Community Hospital Sale
4 Tips for Hospital Merger & Acquisition Success

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