Third Quarter 2016 Shows Signs of Slowing

Eight months into the year is a good time to take stock of the state of the healthcare M&A market. On the whole, volume and value look to be stronger than last year. The first eight months of 2016 show a combined total of 1,019 transactions, compared with 1,005 in the same period in 2015, a 1% difference. Five of the first eight months in 2016 have posted higher transaction totals than the same months in 2015.

Deal values have to be examined more closely, owing to the mega-deals that can create huge month-to-month fluctuations. Total dollars spent in the first eight months of 2016 are approximately $196 billion. In the same period in 2015, spending reached nearly $338 billion, thanks to the $91.2 billion committed to consolidate the managed care market by Aetna (NYSE: AET) and Anthem (NYSE: ANTM). Those deals, targeting Humana (NYSE: HUM) and Cigna (NYSE: CI), respectively, are being challenged by the Department of Justice and judicial decisions will not be known before the end of 2016. Even if the deals are removed from the equation, spending in the first eight months of 2015 was approximately $247 billion, still 27% higher than 2016’s total.

So this year’s M&A activity is comparable to last year’s, at this point. But looking at the first two months of the third quarter, July and August 2016, shows deal activity weakening compared with July and August 2015 (143 deals and 138 deals, respectively). The third quarter last year ended with 411 deals, a record number for any quarter. With only 237 transactions on the books in the third quarter of 2016, September will have to be a break-out month to even approach last year’s total.

That scenario seems unlikely, as we head into the “final weeks” of this highly contentious presidential election cycle. Dread has joined uncertainty as a prevailing sentiment, as neither of the two main party candidates are well liked or trusted by voters, including those in their own parties. The combination of dread and uncertainty will certainly be a drag on deal making into the end of the year.

It’s become conventional wisdom that, should Democratic nominee Hillary Clinton win, the ACA will remain intact, if not improved. Should Republican nominee Donald Trump win, his repeal-and-replace position faces strong opposition, even from some large healthcare players. The marketplace has certainly adapted to new rules since 2010, and going back isn’t an attractive option to many who’ve invested in the ACA’s influence and impact.

How does August 2016 stack up against August 2015? Deal volume was down 14%, to 119, versus 138 transactions a year ago. However, deal value was up 64%, to $21.8 billion, compared with last year’s $13.3 billion. The largest deal in August 2016 was Pfizer’s (NYSE: PFE) $13.5 billion acquisition of Medivation (NASDAQ: MDVN), followed by the $2.3 billion privatization of Press Ganey Holdings (NYSE: PGND) by EQT Partners.

We don’t expect a rapid acceleration in deal announcements to rival last September’s 130. October 2015 posted 110 deals, which is still well within reach this year. It’s what happens in November that could make or break the year. Vote early, but not often. □

 

 

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