Healthcare companies can grow through organic expansion or mergers and acquisitions. Mergers and acquisitions can be driven by distressed opportunities, regional healthcare legislation, or private equity firms. Consolidation does not always lead to layoffs.
Healthcare companies must continue to grow to stay competitive and grow revenues and profits. The two primary ways a company in this industry can grow is through organic expansion of its business, which focuses on growth internally or through mergers and acquisitions in the healthcare industry. Mergers and acquisitions in the healthcare industry are transactions in which a larger entity buys a smaller company or two companies of the same or similar size combine to strengthen a position in the industry. Different types of healthcare companies can participate in the consolidation, including pharmaceutical companies, hospitals and medical device manufacturers.
Healthcare is a capital intensive business. The requirements for accessing capital or cash are large. Creating drugs and passing those drugs through layers of clinical trials before getting federal approval to sell those items takes large amounts of time and investment.
When drugmakers are short on money and may not have the resources to continue drug development, they could become a target for mergers and acquisitions in the healthcare sector. Worse, if a company fails in clinical trials for drug development, it could put the company in a distressed state where it needs financial help just to continue commercial operations. Distressed opportunities can be a driving factor for mergers and acquisitions in the healthcare industry because, in these deals, a buyer is often able to buy the target company at a discount, considering the target company worth saving. Financial support from the buyer coupled with access to the target company’s products or valuable patents could lead to a successful future for the combined entity.
Consolidation between hospitals is another way mergers and acquisitions happen in the healthcare sector. Regional health care legislation can greatly influence the amount of revenue a hospital earns and how those funds are earned, such as through insurance companies or the patients themselves. As a result, healthcare laws may be a determining factor in hospital consolidation. When two hospitals merge, it doesn’t necessarily lead to layoffs, although management typically uses a major event such as a merger to eliminate layoffs and streamline which areas and departments can be most effective.
Mergers and acquisitions in the healthcare industry are not always accomplished by strategic agreements with two companies that have similar and competing lines of business. Private equity firms are financial entities that buy stakes in businesses or entire companies that need equity financing. The private equity firm typically participates in improving the business operations of its purchase. Once these improvements are evident, the finance company attempts to sell those assets or the company to another buyer. Or, the private equity firm helps healthcare companies start selling shares on public markets in an initial public offering (IPO).
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