Mergers, mergers everywhere: Is one in your company’s future?
Make it a reality with clear mission, strong communications
Aetna and U.S. Healthcare did it. Chrysler and Mercedes Benz did it. So did Citicorp and Travelers. With global competition, industrial consolidations, and technological advances, mergers make good business sense for many organizations. The home care sector is no exception. Medicare-certified providers are joining forces to stave off interim payment system-induced insolvency.
With good growth prospects, private duty companies are merging to enter new markets, offer new services, access capital, and improve organizational infrastructure. The promise of a being a competitive powerhouse, however, may not outweigh the loss of identity or control or the possibility of a failed union following huge resource expenditures.
"You need to be pretty convinced that one and one make five to merge. If one and one make three, it may not be enough of an incentive, because there are a lot of tradeoffs in a merger," says Jeffrey Blumengold, FHFMA, CPA, partner-in-charge of health care services at M.R. Weiser & Co., an accounting and consulting firm in Edison, NJ.
Those contemplating mergers can successfully merge with other organizations by undertaking the following actions, sources advise:
• Do a strategic assessment.
Understanding both your current and desired positions within your market is crucial to the success of any merger. "You must have a clear vision of why you’re doing it and what your mission is," says Blumengold.
What are you getting out of it?
"The organizations have to know that together they can do more. It affords a greater opportunity to do something and they can get something they want out of it," says Peggy Gilmour, RN, MS, president and chief executive officer of Nashua, NH-based Home Health and Hospice Care.
A veteran of two mergers — one a sterling success and the other a stunning failure — Gilmour had good reasons for entering both. The first, in 1989, involved two visiting nurse associations and a hospice that became Home Health and Hospice Care.
"There were economies of scale, and the health care environment was changing. With more regionalization, our communities were becoming blurred and our original separateness was going away. The hospice did the only fundraising. It seemed to make sense," she says.
"Although it was a difficult and painful process, it was successful. The people who needed to leave left, and we went forward with confidence. It helped us approach the second one without trepidation," she adds.
An unsuccessful merger
In merger No. 2 in 1996, Home Health and Hospice Care joined a local hospital as it entered a large multistate system.
"With the advance of managed care, both real and projected, we assumed there would be a capitated world and that capitated systems would push down to their system [affiliates]," Gilmour explains. At the same time, two local hospitals, including the one Home Health and Hospice Care eventually merged with, were going through a "make or buy" decision process regarding home care services and entered talks with Gilmour.
In the end, "part of it was their approach, which was not, We’re going to take you over,’ but, we want to work with you.’ It was the vulnerability of being out there on your own and needing a solid referral base, combined with the local environment choosing partners. When at the same time [this] hospital was negotiating with the multihospital system. We could stay on our own, be a hospital department or contract with the hospital, but they were wholly owned, so why not join?" she says.
Despite its promise, this merger proved unsuccessful and dissolved just one year after its formation when the system board voted to disband. Given the option of joining with a part of the dismembered system, Home Health and Hospice Care instead chose independence, as did its local hospital counterpart. "Although we did due diligence, we didn’t understand the fragility of unlike entities coming together," Gilmour says.
Even the first merger that created Home Health and Hospice Care took two years to mesh cultures despite common missions and a new CEO with no ties to any of the combining entities, Gilmour notes.
Find common ground
Issues surrounding mission and culture, in fact, often scuttle otherwise promising mergers. "I’ve seen a fair number of deals fall apart because of cultural clashes," says Larri Short, an attorney with Arent, Fox, Kintner, Plotkin, and Kahn, in Washington, DC.
• Identify threshold issues.
To minimize the risk of failure, identify the threshold or non-negotiable issues before engaging in any merger talks, Blumengold advises.
"You have to be quite clear and cautious with whomever you deal with. I’m surprised that people give short shrift to things they say are no big deal, and they turn out to be a deal-breaker. They run the gamut from the mission to support for individual programs that may be unprofitable to how the new company will be governed," he says.
• Work out board and management leadership issues.
Good communication between board members and management staff, as well as a clear understanding of who is guiding merger discussions are essential, according to Blumengold. "You have to make sure management is listening to the board. The board may have a different vision of what they want to get out of it."
Such an intra-organizational understanding is important because of the difficulty of gaining consensus between boards of the merging companies, Short notes. "Mergers are more difficult to orchestrate with community boards. The two boards can agree philosophically on a new service, but a total philosophy may not be completely compatible, especially if both organizations have been in the community a long time."
Home Health and Hospice Care used board task groups to facilitate a better understanding of merger issues from both management and board perspectives, according to Gilmour. "It was partly to get the work done and also to get to know each other," she says.
The composition of the board also influences the overall merger dialogue. "Who your board members are is very important. You can’t have board members holding on to the past. You have to know who will let go," Gilmour advises.
• Be willing to let go.
"Private duty companies are lead by well-intentioned people who now face a whole new set of business circumstances and are forced to look at no longer controlling their companies. Psychologically alone, that’s very difficult. It’s few and far between, the CEO who can say, I’m willing to work for an organization and not just myself,’" Blumengold explains.
Non-owner senior managers also face the harsh reality that what is best for the company and for themselves may be diametrically opposed.
"They need to be strong enough not to be threatened by fairly important issues that can affect their career. The No. 2 issue [in consummating mergers] is that people look at them personally, not with eyes for the business. But they should look at non-personal survivability, and secondarily consider, What’s in this for me?’" Blumengold adds.
• Conduct due diligence on your potential partner.
It is important to verify the credibility of a potential partner before beginning discussions, Blumengold advises. "You need to pick people you’d really like to work with."
• Maintain confidentiality.
Keeping discussions under wraps allows participants to fully explore a potential relationship, and present their positions honestly and openly.
• Use advisors.
"It is extremely important to have good outside independent facilitation. They can put the tough issues on the table and help participants work through threshold topics," Blumengold notes.
Involving legal counsel early on is also important. While the Department of Justice increased its health care antitrust enforcement efforts in recent years, it is more likely to focus on large organizations.
"The government is not likely to look at two small, private duty agencies merging in the same city. [However], some states are beginning to look more closely at any nonprofit merger, especially nonprofits merging with for-profits, but also with other nonprofits. You need to determine whether the state attorney general has supervisory review over nonprofits," Short says.
• Keep discussions moving.
Inertia is the enemy of closed merger talks. Use a timeline to keep parties focused and force discussion about critical issues, Blumengold advises.
• Consider a strategic alliance.
If the prospect of ceding organizational control seems too daunting, then consider a strategic alliance with potential partners. "You can court before you get married. Each party can throw in a little money and see how the program works," Short suggests.
Despite best efforts, some mergers never make it across the goal line. Philosophical issues are often the culprit.
"It’s either individual egos or key trustees having differing views of what the organizations bring together," says Blumengold. Communication gaps, from either not clearly articulating one’s vision or needs or not listening to those of others, also cause failure. "Professionals get involved, and it doesn’t look like it started out. They should have input, but they need guidance from management and the board."
Some providers, fearful of losing organizational control or a valued name or program, delay engaging in merger discussions until it is too late. "I’ve seen an enormous spurt in Chapter 11 and 7 workouts. People wait too long to get together. The single most important thing is to lead, follow, or get out of the way. If you see danger ahead and have a need to act, the worst thing is to have paralysis," says Blumengold.
Fears of giving away the best parts of your organizations may be unwarranted at any rate. While economics and size often determine post-merger control, "the surviving entity may be the one with better relations with regulators, or a high profile nonprofit Medicare entity may survive," says Short.
Blumengold agrees. "Not everything is dollars and cents. There is a lot of intrinsic value in the market place in a reputation and good operating history," he notes.
You have reached your article limit for the month. Subscribe now to access this article plus other member-only content.
- Award-winning Medical Content
- Latest Advances & Development in Medicine
- Unbiased Content