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Behind closed doors: The lesser-known details of mergers of equals

Hospitals and health systems join together for a variety of reasons. Although every merger is different — as each is tailored to the unique needs and traits of the participating organizations — more systems are seeking partners to break from the past.

Capital needs and financial distress will continue as principal drivers of hospital and health system transactions. However, in an era when the industry is collectively shifting focus and investments toward lower cost, value-based care and population health management, even financially successful organizations see the value in joining forces with other systems whose resources and scale complement their own. In a "merger of equals," hospitals and health systems have an opportunity to achieve this.

"Mergers of equals allow healthcare leaders to move their organizations through a period of change, even when they are [already] successful," says David Jarrard, CEO of Jarrard Phillips Cate & Hancock, a healthcare strategic communications firm based in Brentwood, Tenn. "Often, change is needed because one system is struggling or something isn't working. But sometimes the hardest change has to occur when the organization is still vibrant and successful in the current business model."

According to Mr. Jarrard, smart leaders look ahead to the future and seek ways to create new business models that are best suited to meet future demands.

A merger of equals, also commonly referred to as a founder transaction or simply consolidation, does not follow a traditional acquisition or merger model where there is a perceived "winner" or "loser," or when one system simply hands over its keys to the other, ready to be completely absorbed into the dominant organization's management and financial system. Instead, a merger of equals is driven by shared strategic imperatives and an understanding that each participating system can contribute valuable resources to meet mutual goals.

"It isn't about 'our way' or 'their way' but creating a new way to better serve the community," Mr. Jarrard says. "Mergers of equals can take down barriers and silos and old ways of thinking."

What is the definition of 'equal'?

"Equal" is not a mathematical or legal term in this application. Rather, a merger of equals connotes the two or more organizations approaching the merger do so with the understanding that they will wage equal authority in the development of the deal and the new system's management, according to Mr. Jarrard.

While one system may be larger than the other and have more capital or clinical programs of higher quality, if two organizations seek to join forces to create a new system, they must see themselves as equal partners. Instead of imagining two equal halves forming a whole, a merger of equals can be more accurately depicted as two jigsaw pieces fitting together, as both parties complement and recognize the value of their combined resources.

According to Jim Blake, managing director of Kaufman Hall, there are three main criteria a deal must satisfy to be considered a merger of equals. First, the two or more participating entities must be motivated by the goal of creating a new and better system for delivering care, not just for acquiring scale. The transformational aspect is key.

Second, a merger of equals is a non-value-based transaction. "Unlike most transactions where there is a transfer of value from one system to another, the worth of each organization is not the focus in these discussions," Mr. Blake says.

The third criterion is that as a non-value-based transaction, the board seats are not determined based on value, meaning the two or more organizations creating the new system each contribute an equal number of board members.

"The most successful deals aren't created from conversations where people are asking, 'What can I bring to the table?' but, 'Now that we're at the table, what can we create?" says Mr. Blake.

One timely example of such a deal is the pending merger between Downers Grove, Ill.-based Advocate Health Care and Evanston, Ill.-based NorthShore University HealthSystem. The consolidation of the two individually successful systems, currently under further review by the FTC, would create the largest healthcare delivery system in Illinois and the 11th largest nonprofit system in the U.S.

According to a statement from NorthShore, the agreement "outlines plans to consolidate balance sheets and a single board of directors, as well as a unified mission, vision and strategy."

Jim Skogsbergh, president and CEO of Advocate, and Mark Neaman, president and CEO of NorthShore, will serve as co-CEOs for a designated timeframe, and the new Advocate NorthShore Health Partners system board of directors will be made up of an equal number of members from Advocate and NorthShore, according to a statement from NorthShore.

According to Jordan Shields, vice president of Juniper Advisory in Chicago, "The most successful consolidations don't have winners or losers. They have two partners that come together and share a vision for healthcare in their communities — it is a vision for the future that isn't based on their pasts."

Designing a merger of equals

When one party approaches the other about consolidating, they establish at the beginning that the deal is not a take-over for either one, Mr. Blake explains. Because of this, it does not matter who first proposes the idea to merge.

In traditional mergers and acquisitions, CEOs or board chairs can take the deal fairly far before needing to seek approval from the board, whereas in a merger of equals, the board must be included much earlier on.

"The very identity of who you are will change in doing this kind of transaction," says Mr. Blake. "Both parties must ask if they're ready for that. It's the board's decision, not just the management's decision. The deal could be changing something that's been in place for 100 years."

Small meetings

Although both parties' boards are involved in the development of the deal from the beginning, preliminary talks are relatively exclusive. Because of the sensitivity of the changes discussed — a new vision, purpose, changes to management and likely a new name — discussions during the early planning stages are kept confidential between a small group of board members and senior leaders from both entities, according to Mr. Blake.

"These deals can only be done if kept to a small group initially so they can further vet one another and decide if they really want to come together," says Mr. Blake. However, this period of due diligence is characterized by determining if the systems' goals and values are truly aligned, in addition to identifying any possible instances of noncompliance or other situations that could prevent a successful merger. It is not so much about determining differences in financial value to use as a negotiating chip.

An added benefit of the confidential nature of these discussions and small number of people involved is fewer people knowing if one or both parties determine not to go through with the deal.

"There is a perceived downside of a deal falling apart," says Mr. Blake. "Keeping it small allows more freedom to decide whether the deal is right or not, as opposed to being perceived as a failure if the two systems can't come together." In contrast, publicizing talks of a merger too soon can be a disservice to the organizations if the deal falls through, as staff may lose confidence in leadership's decision-making and strategy.


There is no standard timeline for developing and implementing a merger of equals. While in some instances joining health systems hold weekly meetings to develop the deal, others will talk every month or even less often. However, once the key gating issues are addressed, it is important to keep focus and a forward momentum, which can be difficult while trying to maintain daily operations.

At the same time, neither party can be afraid of walking away at any point, regardless of timing. Like architects, both parties should maintain the attitude of "measure twice, cut once," because the consequences of two incompatible systems merging are much worse than any impact of calling the deal off, according to Mr. Blake.

A merger of equals comes with a unique set of challenges

Unlike traditional acquisitions or mergers in which one party assumes a dominant role and takes over the other, equal consolidation deals can be much more complicated, especially when it comes to determining who will lead the new system.

CEOs are instrumental in determining how their organizations will grow and change. Health system leaders' drive to do what is best for the community, along with well-designed incentive packages, mitigate individual CEOs' ambition or egos from blocking a deal, Mr. Shields says.

In other words, it is unusual for a consolidation to be called off because neither CEO will agree to step down. Usually, the new system's executive positions are determined very early on in the merger's planning stages in an amicable discussion between the CEOs and board leadership, according to Mr. Shields. This might mean both CEOs serve in senior management roles or that one steps down.

However, in some cases, senior leaders' egos do play a role in the discussions. After all, people don't become CEOs without a healthy sense of confidence, according to Mr. Blake. If one CEO is close to retiring, possible tension around choosing a CEO for the new system can be avoided, but this is not always the case.

The board's close involvement in planning the merger can prevent personal issues from threatening the deal, according to Mr. Blake. "Once [the board] realizes they've gotten past the key issues, the transaction will make sense and help the system be successful, save millions of dollars and create a successful strategy and vision — it realizes the new, transformational company is bigger than just one individual," he said.

When coming together, every decision made for the new system must be evidence-based and fact-driven, according to Mr. Blake. This approach is more difficult when selecting a leader, but both parties must keep what is best for the combined system front-of-mind at all times. This could even mean selecting a new leader altogether.

Culture as an obstacle

Two combining entities must have a strong cultural affinity, according to Mr. Shields. Like the pieces of a jigsaw puzzle joining together to create a more complete whole, the combining health systems must offer one another complementary resources and value, but they must also have cultural similarities. Incompatible cultures can pose a major obstacle during a merger, and can even be a primary reason a merger is called off. This is why it is imperative for both health systems to gain a deep understanding of the other's culture in the very beginning of the process so they can identify any potential roadblocks.

The January 2012 merger of St. Joseph Health System in Lexington, which was part of Englewood, Colo.-based Catholic Health Initiatives, with Jewish Hospital & St. Mary's HealthCare in Louisville to create Louisville-based KentuckyOne Health, and the new system's subsequent partnership with the University of Louisville Hospital, is a prime example of three systems with very different cultures merging successfully.

"You have to recognize the heritage of each [partner], what it means and how people experience that heritage… [And when combining the organizations,] you have to ensure everyone sees themselves in the new purpose and value and mission statements," Ruth Brinkley, president and CEO of KentuckyOne Health, told the Catholic Health Association of the United States.

KentuckyOne Health is comprised of a Catholic organization, a Jewish organization and an academic medical center — three institutions with distinct heritages and cultures. Initially, individuals from each organization were wary of the merger's impacts on their respective cultures. People at the Catholic facilities feared their heritage would be "diluted," while the Jewish and secular organizations "were afraid we'd put up crucifixes and a papal flag," Ms. Brinkley told the CHA. Furthermore, when the University of Louisville Hospital was thrown into the mix, there was a lot of public scrutiny in relation to the separation of church and state.

KentuckyOne Health has overcome each of its legacy organization's qualms by taking a deliberate approach to integrating the cultures. It began by surveying employees of each system to identify which aspects of their organizations' cultures they cared most to preserve, then drew insights from the surveys to write a new purpose, set of values and mission statement that effectively melded the top priorities of the three combining systems.

Mergers between systems with distinct cultures, such as KentuckyOne Health, can be extremely challenging. However, having different cultures is not a surefire sign a merger won't be a success, it is just a signal the merger may have more culture-related difficulties and will require careful attention to and planning of integration.

On the other hand, many organizations are in need of a cultural makeover, and merging with another organization or working to instill a new culture altogether could be beneficial in some cases, according to Mr. Blake. For example, a significant cultural change is needed to support the transformation from a fee-for-service to value-based system of care. The industry-wide push to implement population health management also requires care teams to adopt a new outlook and approach to delivering care.

While addressing the issue of culture, it is also important to think of processes for how, as a newly combined system, people from the formerly separate entities will be able to voice their concerns and ideas up through the ranks to a larger senior leadership cohort, according to Mr. Jarrard. "That's why these kinds of mergers may take longer — they are more political and require more conversation, but they can also be stronger."

Finally, experience with traditional merger and acquisition deals can even be an impediment to a successful merger of equals, because the latter requires a completely different approach, which can be a difficult adjustment.

"If you let the parties involved — lawyers, board members and other leaders — treat [the merger] just like an acquisition, they start initiating due diligence like it is an acquisition, which can be very challenging to the process," says Mr. Blake.

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