First published in the Australian Ageing Agenda Magazine, March-April 2013. Reprinted with permission.
Merger and acquisition activity has stepped up as aged services get serious about their futures. But there are plenty of potholes to watch for along the road to a marriage made in heaven, writes Victor Harcourt.
The Living Longer. Living Better reforms announced by the government reflect its policy position about coping with the changing needs of our society. It also reflects its fiscal position in allocating the resources to manage those changes.
The tension between this fiscal and policy position, and the financial needs of the industry will create opportunities for some providers and be fatal for others. Uncertainty about the impact of the reforms, combined with the economic downturn and withdrawal of government expenditure form the economy, are already driving many providers to consider their future.
Other systemic or financial factors are driving change too. The fragmentation of services and the lack of single national service organisations is one factor. Others include the competition and overlap between service organisations is one factor. Others include the competition and overlap between service providers, and ‘subsectors’ within the sector; and diminishing donor pools, coupled with competition from other charitable and fundraising causes.
Rohan Filer, Director of Pitcher Partners, says about the current environment:
“Fundamentally, business valuation is based on financial returns and risks. The changes to the aged care funding environment have reacted real uncertainty for operators, leading to possible reductions in returns as well as increases in operational and financial risks. This leads to a suppression of values until such time as uncertainty is reduced and risks can be mitigated.
This potentially creates acquisition opportunities. The ability to create economies of scale through combining operations and deepening management experience allows organisations to benefit through the acquisition of smaller businesses which may be available at a reasonable price.”
Understanding the options
For some, the drivers are more urgent and necessary than for others who can reflect upon their strategic development options with some flexibility and time. Anecdotally and from my own observations, it is clear there are more amalgamations and mergers taking place involving both private and not for profits (NFPs), community and faith-based.
If there is any trend, it seems to be the smaller, regional providers looking to secure their future through amalgamations with larger NFPs. The larger NFPs seem very well placed to take advantage of these opportunities, as are many private providers.
What strategic development options might providers consider? Broadly, they are:
- pursue growth through developing the business;
- sell, close or buy;
- enter into strategic partnerships or joint ventures;
Merge or Amalgamate?
Amalgamations tend to involve smaller providers seeking out and joining with larger providers. An effective amalgamation usually sees a larger and stronger provider, with a greater capacity for future growth. Usually it is the larger provider’s systems and culture which prevails but the benefit for the smaller provider is the continuation of the business.
Mergers on the other hand tend to be more focused on creating a new provider with its own brand and culture which is a unique blend of both providers. Key to the success of mergers is the alignment of the vision, values and cultures of the providers. Mergers produce economies of scale and efficiencies which set the provider up for future growth.
There is no right or wrong answer to whether an amalgamation or a merger is the best option. However, any organisation embarking upon an amalgamation or a merger must be absolutely clear about why it has chosen that strategic path and what they want to achieve. For example, it could be to achieve “a better result for clients from a high quality, sustainable service provider.”
Once a simple, broad, overreaching objective is agreed, then more specific objectives should be agreed upon. For example, seeking greater scale and reach of services over a broader geographic area or client base; or a consistent and more wide reaching service model.
Business strategist, Michael Goldsworthy, has identified 10 Steps to the Altar, critical for achieving a successful merger or amalgamation [see below], while Rohan Filer stresses the importance of financial modelling in considering options:
“Financial modelling is more than simply projecting a profit and loss or cashflow for the coming year. Stress testing the financial data, based on scenario analysis, is critical in order to determine the ability of the business to withstand further shocks to the business environment – whether of a regulatory, economic, strategic or operational nature.”
The development of key objectives and key performance indicators (KPIs) during the process of getting to the amalgamation or merger is vital to the success of the project. The KPIs will form the touchstone for measuring the effectiveness of the merger in all-important years post-merger.
One of my colleagues, Paul Gleeson, a principal in the corporate and commercial tam has emphasised the need for communication and balance:
The people charged with implementing the merger should concentrate on the high level detail only. There should be enough detail built into the merger business case to address each of the fundamental concerns and drivers, but not so much detail as to complicate the political processes needed in order to achieve a merger.
“As part of this process, each organisation should be prepared to engage in robust dialogue so that all key issues are put on the table and addressed. The objective is to strike the right balance between idealism and pragmatism in order to get the merger done. The more detailed decisions, relating to implementation of the objectives and the establishment and consolidation of the new organisation post-merger, should be left to be dealt with after the merger has been agreed, but should be addressed as soon as possible.”
Whichever option is chosen, whatever process is engaged in, the amalgamation or merger should never be the end of the process. It is only the beginning.
10 Steps to the Altar
- Initial discussions between providers involving CEOs consider the opportunities, risks, objectives and options;
- Developing an agreement about the process which is documented and protected in a memorandum of understanding and confidentiality agreement;
- Creating working groups with high level personnel to engage in the process;
- Developing a plan which identifies the vision, values, future and objectives of the strategy;
- A due diligence process which covers legal, financial, cultural and service areas;
- Boards reviewing the plan;
- Staff and stakeholder communications;
- Member communications;
- Member vote;
- Implementing the plan;
Source: Michael Goldsworthy, Australian Strategic Services
Victor Harcourt is a principal and head of the health and aged care practice at Russell Kennedy. He was assisted by Michael Goldsworthy, principal consultant at Australian Strategic Services; Rohan Filer, director and Paul Gleeson, principal, at Pitcher Partners to write this article.