As the Affordable Care Act (ACA) moves into full implementation mode, many healthcare companies are considering their strategic options. Certainly there are opportunities for growth in every market, but some companies believe the reimbursement, compliance and competitive risks outweigh the potential future returns. Many CEOs tell us that the idea of opening up the sale of their company to the broader marketplace in this competitive environment raises a number of concerns. These concerns are valid, and in some situations we recommend exploring exit options through the process of a strategic auction.
A strategic auction, sometimes called a limited auction, is the process of formally or informally presenting the company to a limited number of buyers. Unlike a broad auction, it’s a more focused discussion between the company’s adviser (if they have one) the executive team and 3-6 potential buyers, all of whom have been selected in a strategic way. With a broad auction, an investment banker or broker presents the company to dozens, maybe hundreds of potential buyers and guides them through specific deadlines, requirements and milestones to continue participating in the auction. A strategic auction slows the process down in order to evaluate buyers and alternatives more strategically.
Boards of directors, senior executives and business owners choose the option of a strategic auction for a few reasons. Perhaps they want to test the market to see how certain buyers perceive their company. We’ve also recommended a strategic auction to owners who want to explore strategic options to growing the business so they have a complete picture of all of the available possibilities. Other companies use a strategic auction process because they received an unsolicited offer, and they want to make sure it is an appropriate price. Then there are those executives that have determined that an exit is the right strategy, but want to proceed slowly.
There are three distinct benefits to using a strategic auction process:
With a focused, strategic list of potential buyers, companies can maximize control over the process, especially in the area of confidentiality. With broader auctions, keeping the sale of a company confidential can be a challenge, because the process requires exposing the company to a wide array of potential buyers across the marketplace. We usually work with our clients to develop a focused list that comprises 1-2 financial buyers, 1-2 strategic buyers from within the client’s industry segment, and 1-2 strategic buyers from outside the industry segment who may present an interesting synergy. This last point is particularly important because strategic buyers from outside of your particular segment generally are willing to pay a premium for a business because they are looking to acquire a new competency. For instance, assisted living or senior living company acquiring home care agencies or, home healthcare acquiring a medical house call practice or, a dialysis clinic acquiring a home infusion company. The DealZumo platform allows you to confidentially present your business to over 60 different healthcare segments. With today’s changing healthcare landscape, you never know where interest might come from.
Limited disruption to the business.
The M&A process – especially a broad auction – can disrupt the day-to-day operations of a business. It is common in a broader auction for executive teams to sit through 10-20 buyer presentations and participate in countless conference calls to answer questions about the business. A strategic auction restricts the amount of disruptions because the conversations are much more exclusive with a narrow group of buyers.
Preparing for a strategic auction helps solidify a strategic direction.
With a strategic auction it is necessary to develop a strategy for each buyer group. Often this preparation will reveal growth alternatives that do not involve divesting from the business. The process can identify joint ventures, partnerships and other strategic initiatives that can rejuvenate or accelerate a company’s growth trajectory.