Top 7 Reasons Why Healthcare M&A Deals Fail
Successful healthcare entities consider mergers and acquisitions (M&A) as a core component of their growth strategy. PwC’s 2024 global industry trends report predicts an upward M&A trend in the healthcare industry.
However, few truly weigh the extended risks or aftershocks M&A deals have on their operations. While the allure of increased market share, operational synergies, and expanded service offerings drives billions in M&A activity each year, healthcare organizations face several challenges that can derail even the most promising combinations.
From misaligned organizational cultures and incompatible IT systems to regulatory hurdles and patient care disruptions, the path to successful integration is far more complex than many executives anticipate.
M&A Trends
The global M&A market has yet to fully recover from the slowdown witnessed in 2022, with 2023 witnessing the completion of nearly 40,000 global M&A transactions, as per German-based Statista’s data.
While during the first half of 2024, deal values increased by 5% year-on-year (YoY), the global transaction volume fell by 25% compared to the same period in 2023, according to PwC’s 2024 global industry trends report.
But when it comes to M&A transactions, it’s important to take heed of the culprits that result in failed deals.
What Sets the Healthcare Sector Apart
Healthcare deals tend to be fewer and wider apart than other industries, partly due to more significant barriers to entry. More imporatly, they tend to have higher proit margins, which drives larger deal valuations and creates complex challenges for both investors and acquired entities looking to realize returns on their investments.
Another common challenge in the global healthcare industry is labor shortage. However, the rise in AI may present opportunities to overcome some labor challenges, through automation of some administrative processes and increasing efficiency in nurse-related processes.
However, entry barriers and labor shortages aren’t the only challenges in the industry. There are more pressing hurdles that may cause the healthcare M&A deal to fail.
Also Read: How to determine the value of a target company
7 reasons why healthcare mergers and acquisitions fail
Given the substantial financial stakes and inherent risks, healthcare key players and conglomerates typically approach M&A opportunities with rigorous due diligence and careful consideration. Unfortunately, some downplay key factors that result in significant consequences post-merger.
1- Strategic misalignment
In general, M&A deals can face significant issues due to fundamental misalignment in strategic objectives between both entites. Especially in the case of acquisitions.
While one side might prioritize profit margins, the could focus on expanding specialty service lines, both of which don’t align.
These priorities often emerge more clearly post-merger, leading to resource allocation conflicts and delayed decision-making.
2- Cultural misalignment
Cultural integration remains one of the most underestimated challenges in any M&A deal. With labor-intensive operations such as hospitals and clinics, for example, and the consequences of misalignment in culture become significant.
When organizations with different approaches to patient care, varying clinical protocols, and distinct administrative practices attempt to merge, friction often emerges at every level.
Physicians may resist new treatment guidelines, staff morale can plummet due to changing procedures, and leadership styles may clash.
These cultural conflicts frequently result in increased turnover among both clinical and administrative staff, directly impacting patient care quality and operational efficiency.
3- Due diligence shortfalls
Inadequate due diligence in healthcare M&A deals often leads to costly surprises post-merger. Due diligence is like an X-ray of both companies’ financial, legal, and operational standing. It is not something to be checked off a list, but rather a process to go through with a fine-tooth comb.
Especially when it comes to hospitals, there are often gaps in the financial or assessment, such as problematic billing practices, compliance issues, or revenue cycle inefficiencies only after the deal closes, to name a few.
The complex nature of healthcare reimbursement and billing makes thorough due diligence particularly challenging, yet critical for deal success.
4- Patient Care Disruption
The impact of an post M&A integration on patient care quality often exceeds initial expectations.
Changes in care protocols, staff turnover, and system transitions can lead to disrupted care continuity and declining patient satisfaction scores.
These disruptions not only affect patient outcomes but also impact reimbursement rates tied to quality metrics. Organizations frequently underestimate the resources required to maintain care quality during integration, leading to both financial and reputational consequences.
5- Weak internal communications
When it comes to communication, there is often a gap between what employees and key stakeholders deem as essential communication and what C-Suites communicate.
In a research paper by global consultancy Gallup, C-suite executives “believe they are doing enough” when it comes to communication about M&A. On the other hand, employees feel their fears aren’t addressed and communication lacks clarity.
It’s essential for C-suites to understand that a clear internal communications strategy—and an impactful one—can be the reason the deal succeeds or fails.
6- Regulatory and Compliance Shortfalls
Healthcare facilities face intense scrutiny from multiple regulatory bodies.
Post-merger compliance issues often emerge, particularly when organizations operate across different geographical markets with varying regulatory requirements.
These regulatory challenges can derail even well-planned integrations and create unexpected operational constraints.
7- Retaining top talents
The human factor is the backbone of any organization, particularly a labor-intensive one such as a hospital, a lab, or a polyclinic.
However, in many M&A deals, the human factor is often overlooked, resulting in an exodus of employees following the completion of a deal.
Retaining talents during M&As, along with maintaining a positive culture could be the reason the M&A deal succeeds or falters.
However, the secretive nature typically associated with M&A negotiations often breeds anxiety and uncertainty among staff.
Employees, particularly those at the acquisition target, frequently face concerns about their job security and future roles.
This atmosphere of uncertainty can lead to preemptive departures of key personnel and decreased morale, even before the deal closes.
Market conditions may still tip the scale
For a successful healthcare M&A deal, it’s essential both parties understand what it takes to achieve long-term success.
For example, a large healthcare merger or acquisition can take anywhere from three to five years to deliver results and revenue, reports global research firm McKinsey.
It’s also imperative to consider that economic and market factors can play a role in the success or failure of a deal.
With healthcare being a focal industry in every economy around the world, there is more at stake when it comes to healthcare mergers or acquisitions compared to other industries.
In the same vein, C-suite executives need to consider the impact of failed or abandoned deals on their business. From repercussions on share prices and valuations to one-off costly advisory and termination fees to employees jumping ship.
Avoiding common pitfalls by conducting financial, strategic, and operational due diligence, along with a post-merger integration strategy can reduce the chances of a failed healthcare M&A deal. However, regulatory approval, economic downturns, among other factors may still result in the deal falling through.
