Health executives have positive deal outlook despite unknowns
Our Capital Confidence Barometer survey results indicate that health executives remain very positive and are looking to boost deals in 2017. 69% of health executives expect to engage in M&A in 2017, an all-time Barometer high. Despite economic uncertainty, the appetite for health dealmaking remains well above the long-term average. Health executives also indicated increased interest in pursuing joint ventures and alliances.
Biggest risks: instability and market volatility
Policy uncertainty related to a new US presidency, political instability due to Brexit and macroeconomic issues in Europe are challenging corporate strategies and posing economic risks to core business. For almost half (46%) of executives, the ongoing volatility in capital markets presents the greatest risk to their M&A strategy.
Biggest disruptor: industry regulation
As health executives consider their capital strategies, regulatory issues and changes in customer behavior are the highest-ranking disruptive forces impacting their businesses. Health executives are paying close attention to industry regulation, which for 41% serves as the greatest disruptor to their core business in the next 12 months. This is in stark contrast to global respondents, only 18% of whom cited it as the top disruptive force. Uncertainty in the US due to Federal Trade Commission and Department of Justice challenges to certain market consolidations, and inconsistency in related court decisions, are key boardroom consideration in dealmaking.
Changes in customer behaviors were cited by 17% of respondents as another significant disruptive force, largely as a result of enabling technologies.
Amid this disruption, executives are looking at both organic and inorganic routes to stronger growth and higher earnings. For example, in an effort to address the impact of sector convergence, health companies are mixing M&A activity with partnerships to achieve returns while managing risk, as 20% of health respondents say they are considering joint ventures and alliances.
M&A confidence: strong but tempered
Buoyed by a new high in anticipated dealmaking, health executives express increasing confidence in the stability of the global M&A market, as well as deal fundamentals. However, their optimism appears to be slightly tempered, as the number of executives feeling positive about the number and quality of acquisition opportunities and the likelihood of closing deals is down from six months ago. Approximately 87% of executives indicate that they have recently stopped short of completing a planned acquisition, with 41% citing the gap between buyer and seller valuation expectations as the key contributing factor.
That said, health companies are maintaining robust pipelines, with 29% saying they have five or more deals in the pipeline, up three percentage points from six months ago. With a drop-off in megadeals, largely as a result of regulatory oversight, most health companies are setting their sights on deals of US$250m or less to fill gaps in their portfolios and address the impact of digital technology — a top issue on the boardroom agenda — in an effort to remain competitive. In fact, reacting to competition was the main strategic driver of 75% of executives for pursuing an acquisition outside their own sector. Within the sector, growing market share was the top focus for 52%.
Top issue in mergers: cultural challenges
The number one issue that health executives identified as negatively impacting integration success was underestimating the cultural challenges in integrations, which at 42% also showed the biggest increase from our last Barometer. The second most frequently identified issue was underestimating the amount of investment required to drive product and revenue growth.
The outlook: consolidation and convergence
As regulatory oversight and competition from within and outside the sector increase, health companies are looking to reduce risk and costs. These initiatives are driving industry consolidation and sector convergence. As a result, we expect M&A, joint ventures and alliances to form a robust part of health organizations’ inorganic growth strategy into 2017.