This article is Part 2 of our series on the hospital merger market. Part 1 (October, 2007) discussed hospital industry dynamics that have led to many of the change-of-control (“merger market”) transactions in this decade and encouraged non-profit boards to be more proactive in their use of this market.
Two Views: For-Profit vs. Non-Profit
Few, if any, large industries have two major groups with such widely divergent views and approaches to the merger market as the hospital industry. For-profit and non-profit systems approach change-of-control dynamics and transactions in entirely different ways. For-profits view the merger market as an ongoing component of their business; non-profits often approach it in an ad hoc manner. This latter view can compromise mission and business interests of the non-profit. This is particularly true in the current environment, which favors non-profit buyers. Historically, non-profit boards have focused on operating and local-market issues. Today, however, many non-profits recognize that they are operating in an industry where:
- Change is occurring to the structure of the industry and the complexity of the business has increased dramatically.
- Both for-profit and non-profit companies are participating in this change, but often with different approaches.
- For-profit companies have had a stronger business case for growth, which has resulted in greater use of the merger market.
The difference in perspectives between the two groups is dramatic, but should narrow in the future. Most for-profit companies:
- Seek growth
- Are organized to both create and react to opportunities quickly
- Understand the procedural nuances of transactions
- Have small boards with national representation and perspective
Whereas, most non-profit systems:
- Seek strong credit profiles
- Are often unprepared to address the merger market
- Often lack experience with the procedural nuances of transactions
- Have larger boards comprised of local leaders
Regardless of whether responding to overtures from for-profit suitors or attempting to grow via acquisition or merger, non-profit boards and CEOs would benefit from reconsidering their approach to the merger market. This is particularly true in light of current conditions that favor non-profit buyers—the credit market crisis and operating environment have caused many for-profits to temporarily reduce their growth objectives.