Best Practice Approaches To Mergers & Acquisitions: A How To Guide

Transcription

1 Best Practice Approaches To Mergers & Acquisitions: A How To Guide #OMPerformance The 2017 OPEN MINDS Performance Management Institute Friday, February 17, :15am 11:30am Joseph Naughton-Travers, Senior Associate, OPEN MINDS York Street, Gettysburg, Pennsylvania Phone: info@openminds.com All Rights Reserved.

2 Agenda I. Market Drivers Of Consolidation II. III. IV. Strategic Considerations In Mergers & Acquisitions The PRS, Inc. Case Study Wendy Gradison, LCSW, President & CEO, PRS, Inc. Joe Getch, MBA, Chief Operating Officer, PRS, Inc. Questions & Discussion All Rights Reserved.

3 Market Drivers Of Consolidation

4 Mergers & Acquisitions On The Rise! Health care M&A activity exploded in % growth in total health care activity from 935 transactions in 2014, to 1,498 in % growth in behavioral health care from 24 in 2014, to 38 in % in managed care from 22 in 2014, to 45 n 2015 Consolidation has been seen by many CEOs as a strategy necessary for longterm survival given the changing environment in health and human services including more valuebased reimbursement, more managed care, and decreased funding All Rights Reserved.

5 Economies Of Scale The phenomenon that production becomes more efficient as the number of goods being produced increases. Larger organizations have the ability to lower their cost per unit thanks to the ability to spread their overhead expenses over a larger number of units. Size doesn t matter without strategy - There are many models that can achieve economies of scale, but your path to collaboration needs to be part of an overall long-term sustainability strategy. There is nothing so useless as doing efficiently that which should not be done at all. Peter Drucker All Rights Reserved.

6 Market Drivers Of Consolidation What s driving the push for economies of scale? Preference for delivery models that focus on the coordination of services for complex consumers ACOs and medical homes new carve-out is by consumer type Challenge for specialists and acute care facilities Reimbursement models focused on value-based payment methodologies Pay-for-performance and risk-based contracting New infrastructure needed Increased financial risk requires finance reserves Ability to cover more consumer services and wider geographic area Use of competitive bidding and selective contracting The cost of competition Narrow networks Consolidation among health plans and health care systems creates new competitive pressures in the rest of the health and human services market All Rights Reserved.

7 Strategic Considerations In Mergers & Acquisitions

8 Consolidation As A Strategic Issue Doing more of a service that is losing money won t necessarily make it profitable. Being big in this instance is only useful if it s part of a strategy to reduce service cost or gain market clout to raise pricing. If the size doesn t come with enough economies of scale to reduce the effective cost of service, the strategy won t work. Adding services and programs unrelated to your mission could result in more problems for marketing and management. Being big can t only be about a number. Some organizations in the field are big but not sustainable because they are diversifying without a strategic plan All Rights Reserved. Increasing size may negatively impact the ability to innovate or adapt. Being big has a disadvantage big is rarely nimble. Larger organizations can be slow to change course, and in a market filled with policy changes, technology innovations, and shifting payment and service delivery models the ability to adapt is a necessity.

9 Size Alone Is Not A Solution Larger organizations can spread the overhead costs for technology, financing expenses, compliance, marketing, legal counsel, and other core competencies over a larger revenue base which in many cases gives them a lower unit cost. However, not all of the large organizations that are a result of these mergers and acquisitions are doing well either from a service delivery perspective or a financial perspective All Rights Reserved.

10 Being Big Isn t A Strategy In maintaining competitive advantage in a changing market, size and scale are just part of the equation A large organization that is unwilling or unable to adapt to a changing marketplace is just as susceptible to failure as a small organization All Rights Reserved.

11 Benefits Of A Merger Increase financial strength Continuation and/or expansion of programs and services Integration of services Reduced operational costs Reduced donor fatigue with fewer organizations asking for money The opportunity to rebrand Expansion of geographic/demographic reach Elimination of a competitor for funding Elimination of perceived duplication of services Address delivery weaknesses Open the door to new ideas and innovation All Rights Reserved.

12 Risks Of A Merger 1. Negotiations may ultimately fail 2. Merged organizations may prove incompatible, never achieve a successful integration 3. Cost savings may never actually materialize 4. Tensions between leadership and personnel may never subside and eventually will interfere with operations 5. The public, constituents, and donors may have a negative reaction Top 4 Reasons Why Mergers Fail: 1. A lack of knowledge about how to approach, plan, and implement mergers 2. A lack of funding for due diligence and postmerger integration 3. A failure to find the right partner to merge 4. A tendency to look at mergers reactively, as a way out of financial or leadership problems instead of proactively, as a growth and positioning strategy All Rights Reserved.

13 Have You Asked The Important Questions? Does the organization fit with/support our mission? Have we done our homework on the other organization? What will we gain toward the accomplishment of our immediate and long-term goals? Do I have a strategic reason for this merger or are we growing for growth s sake? How will a merger be perceived by the public, our financial supporters, payers, and consumers? Can we afford the acquisition or merger? How will it be funded? Will the combined organizations have the resources to address the needs of both organizations? How will we determine leadership of the new organization and the make-up of the board of directors? What will happen to current employees and volunteers? Is my board fully bought into this and willing to actively participate? All Rights Reserved.

14 The PRS, Inc. Case Study Wendy Gradison, LCSW, President & CEO, PRS, Inc. Joe Getch, MBA, Chief Operating Officer, PRS, Inc.

15 Merging Together for a Brighter Future

16 Wendy Gradison President and CEO of PRS, Inc. Licensed Clinical Social Worker CEO since 1998 succeeded founder who formed PRS in 1963 Has overseen tripling of revenues

17 Joseph Getch Chief Operating Officer of PRS, Inc. MBA; MSA; BS Economics CARF Surveyor Board Member, Virginia Association of Community- Based Providers (VACBP); Governance Board Member, Magellan of Virginia 12 Years in BH

18 About PRS, Inc. Founded in 1963 Headquartered in McLean, VA Provides intensive support and skills-building to people with serious mental illness, emotional and/or behavioral disorders (northern Virginia and the District of Columbia) PRS CrisisLink is a 24/7/365 volunteer hotline and textline for comprehensive crisis prevention, intervention, suicide prevention PRS merged with CrisisLink in August 2014

19 Objectives After this presentation you will gain insight into: Strategic considerations for a merger Key factors that could make or break a deal The merger process/due diligence The merger process/roll out Challenges and benefits post-merger Lessons learned

20 PRS Merger Timeline Initial contact (6/13) Vote to Proceed with Due Diligence (9/13) Task Force (11/13-2/14) Legal Negotiations (4/14 6/14) Joint Meeting #1 (8/13) Joint Meeting #2 (11/13) Joint Meeting #3 (2/14)

21 PRS Merger Timeline Vote to Merge (6/14) Date of Merger (8/1/14) 150% Revenue Increase Largest Payer CareRing 2.0 (7/16) Chat Next??? Communications and Other Planning and (6/14 8/14) Regional Texting Expansion and Suicide Prevention Website (11/15) New Contract Awarded (11/16)

22 Stages of Change Framework Precontemplation Prior to Contact Jun 2013 Aug 2013 Recurrence? Contemplation Positive Experience! Aug 2014 Present Aug 2013 Nov 2013 Maintenance Preparation Jun 2014 Aug 2014 Action Nov 2013 Jun 2014

23 The Merger Process First steps Preliminary conversations Preliminary fact-finding cursory data collection, discussion and analysis. Any obvious deal breakers? Making the initial case gaining support of senior leadership and Board to begin a more formal process Coming together and forming the merger team

24 Preliminary Conversations CrisisLink approached PRS CrisisLink in precarious financial Merger not part of initial conversation partnership or infrastructure assistance When merger became an option, PRS required exclusivity

25 Preliminary Fact-Finding Cursory review of financials Balance sheet; cash flow Trends and sustainability Understanding operations and how basic business functions were performed

26 Making The Initial Case Obtain broad buy-in from respective Boards to begin a process of more deliberate exploration. Goals Gain shared, in-depth understanding of respective services Identify opportunities for partnership, including merger Develop process, including how, when and to whom steps will be communicated

27 Coming Together Bringing senior staff and Board representatives together to further assess opportunities for partnering, including merger. Reviewed Populations served Services provided Financing and financial health Governance and management/organizational structure Current opportunities and challenges

28 Initial Meeting Outcomes Opportunities for partnerships, including merger, identified. Identification of risks/concerns Identification of next steps

29 The Merger Process Due Diligence Develop a blueprint of the merged organization Negotiation/hammering out the details Legal review Internal and external stakeholder buy-in Seal the deal

30 Conducting Due-Diligence Formal due-diligence process launched at early November 2013 joint meeting Key outcomes Agreement on what success of a merger would look like Conditions that must be meet for both sides to agree to merge Formation of Collaboration Committee for conducting due-diligence

31 Strategic Considerations These were the easy ones: Synergy, > 2 Mission Alignment Community Need

32 Deal Breakers It s all about compromise: Governance Debt Financing Jobs for all staff

33 Legal Review Plan and Agreement of Merger Bylaw Changes (PRS) Articles of Merger

34 The Vote Final resolution of all outstanding issues resolved at early June Board meeting Vote on merger at special meeting in mid-june

35 Implementation Post vote to date of merger (late June to August 1, 2014) Communications Contract/lease transfers Accounting

36 Communications Key audiences Employees Volunteers/Board Members Partners/Funders/Civic Leaders Clients Communication Vehicles Timelines

37 Branding

38 Implementation Post merger and beyond (After August 1, 2014) Continuation of communications plan roll out Integration of CrisisLink staff, Board and volunteers Vendor contract cancellations, final CrisisLink audit and tax returns, integration of payroll and accounting functions, IT integration, etc.

39 Lessons Learned & Outcomes Organizational culture shift managing change is not easy. There will be fallout. Organizations that can benefit from a merger may have multiple serious management deficiencies that hit HR, IT, Finance, supervision, etc. Despite due diligence, issues will emerge over time that are not anticipated. Expect some of these issues.

40 Lessons Learned & Outcomes Service expansion Revenue growth

41 Questions & Discussion

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