M&A appetite in health sector remains healthy amid ongoing disruption

M&A appetite strengthens as health executives look for deals that can help them compete in an evolving landscape.

In this edition of the EY Global Capital Confidence Barometer, the percentage of health companies expecting to pursue M&A in the next 12 months rose slightly, to 50% from 48% in April 2018. Health executives are also optimistic about M&A activity in the months ahead, with 79% seeing it improving, versus 60% a year earlier.

The geopolitical landscape and rapid pace of disruption that continue to impact the health industry are influencing deal strategies. But anticipating regulatory change is becoming a more fundamental consideration as health organizations pursue M&A to help them reach their growth objectives.

We expect to see M&A activity strengthening as health organizations continue to fight for market share to gain more negotiating power with payers and governments. At the same time, ongoing pressures to reduce costs and adopt value-based care models, along with meeting the demands of technology-driven consumers, are forcing buyers to acquire companies capable of evolving within the landscape. We anticipate companies in the US and Asia will comprise the bulk of the sector’s activity as consumer spending power in these economies pushes companies to seek new technologies.

However, 85% of health organizations looking for value-added assets in the coming months indicate they will face stiff competition, with the majority coming from private equity players who have record levels of dry powder seeking to diversify their portfolios in a quest for higher returns.

Activist shareholder pressure compels executives to reshape portfolios

Disruptive trends, combined with pressure from activist shareholders, which 79% of health executives say they are experiencing, have health organizations reviewing their portfolios more often as they seek to realign strategies to address rapidly changing market dynamics.

More than half (56%) of health executives say they are reviewing their portfolios every quarter or more frequently. And while 42% indicate that activist shareholders are pushing them to make acquisitions as part of their portfolio reshaping, as a result of their last portfolio review, 28% suggest they opted to differentially invest capital in a particular business unit. That said, 23% indicated they identified areas where they need to make acquisitions, understanding that both acquisitions and divestitures form an integral part of any portfolio strategy in a disruption-led environment.

M&A will continue to play a role in growth strategy, even as the focus shifts to organic opportunities

While M&A will play a key role in any growth strategy, 75% of health executives say they’ll be focusing on organic growth in the year ahead, making investments in existing operations, portfolio reshaping and transformational investment in digital and technology their top capital allocation priorities.

As the year progresses, health executives will continue to be bullish about their growth ambitions, but will increase their focus on building resilience to withstand the economic headwinds that may be appearing on the horizon.