Ari Markenson
Ari Markenson is a Partner with law firm Venable LLP and a Contributor to Mergers & Acquisitions.

Getting an understanding of whether 2022 healthcare merger and acquisition activity has slowed, is slowing, is leveling out, or is actually on the rise depends on what data, trends, and market information you are analyzing. We explain why below.

In the last 10 years, we have had periods when the media has reported healthcare M&A at its highest level ever. However, when you dig into the data used, it shows one large multi-billion-dollar pharmaceutical merger is leading to those headlines. The flip side is that in some of those same periods primary middle-market portfolio company acquisitions in healthcare were flat, if not dead. What’s actually happening in 2022 is definitely an “it depends” scenario.

As a threshold matter, private deals are not always reported publicly. So, data on exactly what is happening in the middle market isn’t always spot on. Often deal makers get a sense of what is happening anecdotally through their own experience, service providers, the media, and other sources of information. While many media outlets have reported healthcare M&A activity as flat in 2022, when you talk to investors, lenders, M&A counsel, and third-party transaction advisors, you get a very different picture. Those discussions lead to a picture of a marketplace that is extremely active, just possibly not in the ways buyers, sellers, and their advisors would prefer. Deals are happening, marketplace participants are working hard, but healthcare M&A is in a different place, with certain headwinds that historically we have known how to deal with and others that are new challenges.

Primary or platform portfolio deals seem harder to come by. While sellers are continuing to flood the market with opportunities, there still doesn’t seem to be enough inventory. Moreover, competition for the inventory and increasing valuations beyond what many buyers are willing to entertain have led investors to think differently about how they are going to utilize all the “dry powder” they are sitting on. Investors are starting to say, “I really don’t need this; I can get to where I want to be in alternative ways.”

In that respect, investors seem to be retooling, finding ways to grow smaller assets, finding opportunities to aggregate smaller transactions to immediately create a larger platform, starting further down-market than their traditional investing thesis, and even shifting focus to healthcare assets that have not been a historical focus for their fund, like moving from a pure “services” focus to finding something in healthcare IT or manufacturing. Each of these issues affects an analysis of what is happening in the market. If a fund invests in a clinical lab equipment manufacturing business, does the media see that as a healthcare deal or a manufacturing deal? Additionally, when a dental practice management portfolio company makes seven dental practice acquisitions in a week, growing the company from an enterprise value of $30 million to $120 million in a single quarter, the sizes of the transactions involved are not on the radar of the healthcare M&A media and data folks. However, money is being put to work, and eventually the fund holding that asset will look to trade it up-market.

Picking a winner or even making a good bet is harder. An entire analysis of all of the issues that have come into play is beyond the scope of this discussion, but the pandemic, our overall economic outlook, and acute staffing shortages in healthcare are just three major issues that are affecting the ability of buyers to move on deal opportunities. The pandemic saw winners and losers from an operational perspective, and there is uncertainty around certain healthcare businesses’ financial performance. Overall, U.S. economic indicators seem to say different things to different analysts, and it is hard to get a good read. Are we days from a major recession or not? Healthcare staffing was a concern prior to the pandemic; however, it has become seriously acute as a result of the pandemic and the economy. While in certain staff-heavy provider environments it is easy to see the immediate impact, it is not as clear for other provider types and in the long term in general. To be clear, these issues are not necessarily creating a scenario that is completely stunting deal activity. Rather, negotiations are taking longer, diligence may be a bit deeper, and overall time from LOI to close may be longer, given all of these variables.

Healthcare anti-trust enforcement is moving into hyperactivity mode. Traditionally, enforcement has focused on health system mergers and large healthcare businesses. This particular issue has not been a significant factor in healthcare middle-market deals in the first half of 2022. However, how increased enforcement will come into play in the remainder of 2022 and beyond remains to be seen.

After getting to this point if you are wondering how to wade through this mess, here are a few thoughts, in no particular order.

While it has become harder to navigate, the healthcare M&A marketplace is extremely active. If you aren’t finding primary deals, think about the alternatives – growing smaller platforms or looking at assets that have not traditionally been in your thesis.

With so many opportunities, give up early, give up often – opportunities are not drying up. Don’t waste time on the wrong asset and don’t overpay for an asset; it could be a recipe for a discussion with a creditors’ work-out group.

If you don’t have resources to source direct deals, start thinking about creating them. There are many amazing healthcare-focused i-bankers, but there are also lots of founder-owned opportunities yet to be tapped or even found.

Don’t let the need to put money to work cloud your investment judgment. It is an insanely competitive market, but don’t lose sight of the seller who managed to hide that 40 percent of their revenue in the last two years is non-recurring once they return to pre-pandemic operations.

Keep your eyes and ears open – market forces in general are changing rapidly, and the credit you want for the deal next month may quickly get expensive. Factor those possibilities into how you are evaluating purchase price.

Make sure your advisors can act and move as nimbly as you do in this current market. Critical thinking and being “commercial” and “creative” have always been important to deal making, but they have definitely become way more important, given the state of the market today.

Healthcare M&A in 2022 is extremely active, and there are very notable challenges and opportunities for buyers, sellers, and lenders. Understanding where it’s active and why, and then navigating the market and its challenges and opportunities, will ultimately determine whether a market participant finds success. It can be easy to say dealmaking is up or down, but it’s clear that the answer is more nuanced than that.