Our panel, moderated by RBC Capital Market’s Managing Director Ahmed Attia, included:
- Henry Minello, Partner in the Global Healthcare Group of Permira
- Steve Sunshine, Head of Skadden's Global Antitrust and Competition Group
- Larry Grafstein, our Deputy Chairman of Global Investment Banking
For even the most experienced dealmakers in Healthcare, the COVID-19 outbreak has created uncharted territory for M&A transactions. However, early trends are now emerging, along with longer-term, more fundamental changes to deal strategy and approach to both valuation and financing.
For Henry Minello, Partner in the Global Healthcare Group of Permira, it’s been critical to stay up to speed on a constantly evolving landscape. Over the last few months, Permira’s large global portfolio has given him a unique vantage point on the pandemic’s impact.
“The perspective of being a global investor was invaluable to us at the onset of COVID-19,” explains Henry. “We were able to see the early impact in Asia, then Europe, and then here in the US and learn from the developments within our portfolio companies in real time. There was a huge amount of knowledge sharing and an initial period of playing defense, focusing on business continuity, keeping employees safe, and protecting our companies from a supply chain and liquidity standpoint.”
Now, affirms Henry, the time is right to pivot to an offensive strategy. “We have capital to invest and the flexibility to be selective across different geographies. Having ‘go anywhere’ geographically speaking funds is incredibly valuable in a climate like this where you see changes happening pretty rapidly.”
However, in terms of new opportunities, Henry is facing new practical considerations when it comes to getting deals done in today’s environment.
“What’s interesting is that it’s hard to meet someone new over Zoom and see your way to a control transaction if there hasn't been a history there. So, our first area of focus is on our portfolio and figuring out when it makes sense to go on offense in sectors where we have deep experience with management teams we've known for some time. Those seem like the more actionable opportunities for us right now.”
Looking through the antitrust lens
Transacting in the time of COVID-19 has also brought a heightened degree of focus from the US antitrust agencies. Steve Sunshine, Head of Skadden’s Global Antitrust and Competition Group, is close to the impact of this increased scrutiny on Healthcare M&A transactions.
“There's no doubt we're in a period of extremely active antitrust enforcement,” says Steve. “The Obama administration was very active, and we’ve seen surprisingly little change in the present administration, which I would call more populist than conservative when it comes to antitrust.”
According to Steve, misconceptions around market concentration have permeated the antitrust discourse. “There’s a general debate amongst certain people in the public policy area around whether the world has become too concentrated. Big tech is probably the number one focus, but number two is Healthcare. There’s a general idea that a few big, highly leveraged ‘market power companies’ have come into existence because antitrust laws have been too lax – which I think is a big disconnect.”
“Some of the concerns expressed are that we could see assets getting picked up at too low prices, or we could be giving stimulus to companies that might be engaging in predatory behavior,” continues Steve. “But these are all things that are illegal under the current law.”
In recent weeks, Senator Warren and others have come out with proposals to ban M&A activity. “I think the crisis has been turned into political weaponry by some in Washington,” says Steve. “There’s a lot of headlines that reflect a populous concern that antitrust has somehow failed us, and that we should use the pandemic to make some changes.”
“Right now, the current rules are holding in place. There’s potential legislation coming around to change antitrust laws, principally from Democrats with a little bit of Republican support. But because it’s really all based on this populous debate about the role of antitrust. So far we’re also seeing strong opposition from both the DOJ and the FTC.”
“However, we also have an election coming up in 2020, so whether the administration changes – and whether the Senate flips – will have an impact on whether some of these policies start to get traction. It could be a brave new world in 2021.”
Mixed trajectories for Corporate M&A
Corporate M&A is evolving rapidly too. Since COVID-19, we’ve seen some signs of life in the large cap space, along with mixed messages from some of the larger corporates in Healthcare. Some BD teams are focused on a crisis management, while others are very actively refreshing a target wishlist. Is M&A a priority for corporates at the moment?
“I think the combination of the breadth of the impact of COVID-19, the suddenness with which it came on, and the severity of the decline, has been very unusual,” says Larry Grafstein, Deputy Chairman of RBC’s Global Investment Bank. “It’s impacting not just companies and industries with structural problems, but also certain Healthcare sectors that hadn't previously been thought to be exposed in a recessionary environment.”
“Right now, it’s natural for corporates to prioritize employee welfare, business continuity and customer and operational issues, and it's undeniable that – notwithstanding some recent deals – M&A volumes are down dramatically. All of that said, I also think it’s crucial for companies not to let the urgent crowd out the important.”
“I think everybody has an instinctive understanding that some of the very best opportunities arise in crises,” continues Larry. “It's interesting to contemplate why good deals do happen in tougher conditions. It's not just because values can be cheaper, it's because crises clarify. They separate luxury from necessity. They accelerate and focus strategic imperatives. And for those companies that are a little less risk averse, right now is a good time make a move.”
Understandably, the market for M&A has contracted rapidly in the wake of COVID-19. Are we ever going to get back to the robust M&A volumes we’ve seen in recent years?
“It’s true that a lot of deals were put on hold that were close to the finishing line,” says Larry. “So, there are a number that can come back quickly because most of the work has been done. But history suggests it will take several years for volumes to recover fully. And whether they recover to the peaks we’ve seen in the last five or six years, or to the run rates of 2018 and 2019, who knows how long that will take?”
Valuations in a post-pandemic world
With valuations close to all-time highs prior to COVID-19, it may also be challenging to align valuation expectations between buyers and sellers in the current climate. From Henry Minello’s perspective at Permira, Healthcare sellers really haven't rebased their pre-COVID expectations on value.
“There does seem to be a bit of a disconnect that will make deal making more difficult until things normalize,” says Henry. “I think another issue right now is that, depending on size, financing isn’t readily available with the loan markets not functioning normally. There will be direct lender alternatives, likely at a higher rate, but it’s not a normal environment. It’s a situation where private equity firms would need to over equitize in many cases to get things to work. So, it’s not an easy environment to deploy capital, particularly for control deals.”
Henry sees another key trend related to Healthcare companies managing through these difficult times – an increase in divestitures. “This is an area where private equity has shown good success in acquiring non-core segments from corporates – working with them to try and understand their willingness to hive off certain segments that would generate cash for the company today.”
With the market generally rewarding companies for portfolio optimization in recent years, that trend is likely to continue.
New deal dynamics for cross-border activity
Cross-border M&A has been a crucial mainstay of strategic growth and development in the Healthcare industry, which has becoming increasingly global with international providers and suppliers across multiple sectors and markets. However, as Larry highlights, future activity may come under greater scrutiny as dealmakers adapt to the new dynamics shaping the market.
“I think cross-border activity is now absolutely linked to the political overlay of the populist environment that Steve has highlighted,” says Larry. “I think there’s going to be a fair bit of bipartisan support for reviewing supply chain dependencies from other countries. And I think there will be an impetus to repatriate some of those supply chains and to have incentives – hopefully positive ones – to reinvest in the US market.”
“If you look at it from the perspective of other countries around the world, you’ll see similar national concerns that have been brought to the fore by COVID-19 in unexpected ways. Companies will continue to pursue their strategic imperatives across borders, but there will be a lot more thought put into exactly how you execute and what kinds of political concessions you might need to make in order to bolster support for a deal.”
