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5 Reasons to Consider an Acquisition Over a Merger

While hospital merger and acquisition activity is up 20 percent from last year, the M&A process remains difficult for hospital leadership teams and executives to navigate. The reason most mergers fail is due to difficulty in execution, where one management team “survives” while another departs, but Larry Stybel, president of Stybel Peabody Lincolnshire, thinks that’s exactly how M&A integration should work. When it comes to hospitals, Mr. Stybel says acquisitions — not mergers — are the best way for hospitals to move forward without identity crises, inaccurate employee expectations or diluted management.

Here are five reasons why hospitals should consider pursuing acquisitions rather than mergers.

1. There needs to be a winner and a loser for the benefit of the hospital. Acquisitions take care of this upfront. Mr. Stybel considers “mergers” a public relations term, and insists acquisitions are the real method of transaction. When a stronger hospital merges with a weaker one, it is really an acquisition, he argues. To avoid hurt feelings, however, people tag the “merger” title onto these transactions and delay the inevitable. Mr. Stybel says mergers are analogous to a nurse telling a child a shot will be painless — only to have it hurt.

The weaker hospital will probably lose in terms of hospital culture, management and identity. Acquisitions acknowledge this change in the very beginning. “The board will go out of business, the name will be defunct, the culture of the larger organization will dominate. This is what I saw with successful bank mergers. They would just say, ‘As of tomorrow, you will be called X Bank. You will be learning our ways. We’ll try to respect your old ways, but you’re being acquired.’” While this approach may sound harsh, Mr. Stybel calls it “tough love” and says it lets people know where they stand. It also prevents later feelings of betrayal when employees from the weaker hospital realize this was never really a “merger of equals.”

2. Mergers leave employees with inaccurate expectations. Some of best acquisition models Mr. Stybel has seen have been those of banks. When one organization acquired another, they would issue a statement to employees, laying out the changes and potential layoffs ahead. They were upfront about the fact that this was going to be difficult, painful and exhausting.

“They’d say, ‘Probably 50 percent of you won't be here in a few months. There are going to be big changes,’” says Mr. Stybel. “Three months later, instead of 50 percent of employees not being there, 35 percent are gone. Some of the IT systems remained. People look back and say, ‘It wasn't as bad as we'd thought it would be.’ The initial statement was much more severe. My message to boards and CEOs is to calibrate employee expectations for a severe and painful process and try to reduce it." 

Mr. Stybel recommends using the word “merger” with caution. “When you have one organization taking over another organization, but you don’t want to hurt feelings so you call an acquisition a ‘merger,’ you started things off with a lie,” says Mr. Stybel. This misconception may create inaccurate expectations among employees or divisions between the new vs. old hospital staff and physicians, according to Mr. Stybel.

3. Combining hospital boards weakens the strategy-making process, which impairs the entire hospital. Many problems with hospital mergers or acquisitions begin at the board level, since the boards set the strategy. When two hospitals merge and combine board members, it can lead to irreparable governance problems. “So now it’s a much larger board consisting of people who were really acquired, but you didn’t have the courage to be open that this M&A transaction has winners and losers.   The result is that  the board becomes too big and too divergent to properly manage.  Problems at the board elongate the necessary time for smooth acquisition integration.,” says Mr. Stybel.

Instead, he recommends that the board members from the acquired hospital, “all turn in their resignations and go home.” In the end, the hospital will be better off it the board is aligned, organized, familiar with the same hospital culture and able to implement strong strategies.

4. Mergers confuse donors. “It’s important for donors to know who they’re donating to,” says Mr. Stybel. For example, if a hospital with a Jewish heritage mergers with a hospital with a Catholic heritage, , donors may be confused about where their money is actually going. This not only pertains to religiously affiliated hospitals, but to teaching hospitals, private healthcare organizations and community hospitals as well.  The priority of teaching/research/patient service will be a thorny one.  The hospital needs direction from the board about the relative priorities of the new organization.  

Also, Mr. Stybel says one plus one does not always equal a “new one.” When two organizations with separate identities combine and create a new entity, name and brand, it is likely to fail or create confusion. People will still be most familiar with the hospital’s former culture. “It’s better for everyone if there’s a winner and a loser,” says Mr. Stybel.

5. Layoffs are necessary, but outplacement programs can help. While his views may sound like the recipe for a mass layoff, Mr. Stybel urges hospitals not to be afraid to cut positions and help former employees land on their feet through the implementation of outplacement programs. “As a matter of ethics and morality — and to still retain donors — you need to treat these employees that you’re firing as members of the community you live in. There’s an ethical issue here for boards: if we’re in the business of giving care, how do we take care of those who give care?”

The CEO needs to be involved in the selection of the employee outplacement firm to uphold the hospital’s values, says Mr. Stybel. “Too often, it’s the head of HR or finance people that decide what they’re going to do. Often, their mandate is to reduce costs,” he says. At the senior executive levels, outplacement should be intensive and one-on-one, and these executives should be able to choose their own outplacement firm. At the manager level, former employees are usually assigned an outplacement program. Finally, employees at the lower levels can attend outplacement together as a group.

Learn more about Stybel Peabody Lincolnshire.

Read more about hospital mergers and acquisitions:

-Michigan's Saint Joseph Mercy, Physician Group IHA to Merge

-Allscripts and Eclipsys Merge to Create Largest Healthcare Network

-Florida's University Community Health to Merge With Adventist

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