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Healthcare IT M&A Update – December 2023

Administrative Automation Demand Drives Healthcare IT M&A

The Healthcare industry has witnessed a notable shift towards automation and analytic technology, catalyzing growth in the Healthcare Information Technology (IT) sector and fostering activity in the Healthcare IT merger and acquisition (M&A) market. Specifically, the effective deployment of automation technologies, including artificial intelligence (AI), holds tremendous potential to drive performance improvement and yield substantial cost savings within the healthcare ecosystem. McKinsey & Company estimates that such automation efforts could result in annual savings ranging from $200 billion to $360 billion in the United States alone.
A significant portion of these projected savings—approximately one-fourth—is expected to materialize through improvements in administrative functions, particularly with the adoption of advanced revenue cycle management (RCM) systems. These technologies streamline processes, enhance efficiency, and reduce overhead costs associated with administrative tasks, such as billing, claims processing, and financial management. By automating and optimizing these functions, healthcare providers can not only achieve substantial cost savings but also improve revenue capture and operational effectiveness.
Overall, the increasing reliance on automation and analytic technology reflects a broader trend towards digital transformation within the Healthcare industry. As organizations seek innovative solutions to enhance patient care, improve operational efficiency, and address mounting cost pressures, investments in Healthcare IT, particularly in automation-driven initiatives, are expected to remain robust. This presents significant opportunities for growth and investment within the Healthcare IT sector, driving continued activity in mergers, acquisitions, and strategic partnerships aimed at harnessing the transformative potential of technology in healthcare delivery and management.

Healthcare IT IPO Market Remains Muted, Spurring M&A Exits

The Healthcare IT sector has encountered challenges in achieving exits through initial public offerings (IPOs) due to ongoing disruptions in capital markets. Despite strong demand from healthcare services providers seeking technological solutions to address inefficiencies, volatility in the public equity markets, particularly stemming from disruptions in the Banking sector, has dampened enthusiasm for IPOs. Consequently, the Healthcare IT IPO market has remained subdued, with IPOs accounting for only 3.3% (five deals) of total venture capital exits year-to-date (YTD). This represents a significant decline of 50% from the same period in 2022 and a substantial drop of 78.3% from YTD 2021.
Given the uncertainty surrounding potential discounted issue prices in IPOs, later stage Healthcare IT sector players have become increasingly cautious. Many venture capital-backed businesses have pivoted towards pursuing mergers and acquisitions (M&A) as their primary exit strategy. Specifically, transacting with strategic buyers has emerged as a preferred approach, accounting for 69.5% of YTD venture capital exits. This strategic shift enables Healthcare IT companies to access sufficient growth capital and secure the long-term viability of their business amidst challenging market conditions.
Overall, the reluctance to pursue IPOs in the current capital market environment underscores the importance of agility and flexibility in exit strategies for Healthcare IT sector participants. M&A transactions with strategic buyers offer a viable alternative to navigate market uncertainties while ensuring continued growth and sustainability for healthcare technology businesses.
 Healthcare IT M&A Volume Persists Compared to Broader TMT Industry
The Healthcare IT M&A market has remained resilient, with 222 transactions announced or completed year-to-date (YTD). While this represents a slight year-over-year (YOY) decline of 4.7%, it contrasts with a more pronounced drop of 24.7% in total deal volume within the broader Technology, Media & Telecom (TMT) M&A market over the same period. Strategic and financial buyers within the Healthcare IT sector have continued to focus on acquiring businesses with advanced technologies, robust margins, and exposure to key end markets such as Primary Care.
Strategic buyers have maintained their dominance in the Healthcare IT M&A market, accounting for 56.3% of transactions to-date. However, private equity firms have also remained active participants, comprising 43.7% of deals, slightly up from 42.9% in the same period last year. Against the backdrop of an elevated interest rate environment, private equity sponsors have prioritized add-on acquisitions, which represent 38.7% of transactions to-date. This strategy allows them to strengthen their existing portfolio companies while minimizing the need for excessive debt financing.
Overall, despite a modest decline in deal activity, the Healthcare IT M&A market has demonstrated resilience and attractiveness to both strategic and financial buyers. Investments in companies with innovative technologies and exposure to critical healthcare segments continue to be sought after, driving continued activity in mergers and acquisitions within the sector.
Mergers and acquisitions (M&A) multiples in the Healthcare IT sector have maintained their strength, with the average year-to-date (YTD) M&A multiple reaching 5.0x EV/Revenue. This surpasses the broader Technology, Media & Telecom (TMT) industry average of 3.9x EV/Revenue over the same period. Even within the middle market segment, Healthcare IT businesses have commanded robust valuations, with an average YTD purchase multiple of 5.0x EV/Revenue, notably higher than the middle market TMT industry average of 2.6x EV/Revenue.
One of the key drivers behind these strong valuations is the emphasis on sector targets with a high degree of recurring revenue and interoperability. Companies demonstrating these characteristics have continued to attract healthy multiples, despite a slight slowdown in sector deal flow.
Looking ahead, both the TMT and Healthcare industries are expected to remain attractive for M&A activity, according to insights from ESF Equity, LP’s 2023-2024 Trends in Global M&A Survey. A majority of M&A advisors polled in the survey anticipate that these industries will capture the highest M&A valuations, with 64% and 58% of respondents highlighting the TMT and Healthcare sectors, respectively. Given its position at the intersection of these two dynamic industries, the Healthcare IT sector is poised to sustain robust M&A valuations relative to historical averages throughout 2024.
 

Healthcare Providers Adopt RCM Software to Mitigate Staffing Shortages

As the Healthcare industry undergoes rapid digital transformation, it grapples with the challenge of managing an increasing number of data siloes and fragmented workflows. This has led to a heightened demand for Revenue Cycle Management (RCM) solutions, which play a crucial role in streamlining and organizing financial processes within healthcare organizations. RCM software platforms are designed to aggregate data from various sources, including third-party payors, different payment models, and providers' patient networks, consolidating this information into a cohesive and efficient workflow.
The benefits of RCM solutions have garnered significant attention from healthcare providers, with a substantial 61% expressing interest in outsourcing RCM processes to external parties, according to CWH Advisors' 2022 PatientPay Survey. This interest stems from the recognition that RCM software can significantly improve revenue cycle efficiency, enhance financial performance, and alleviate administrative burdens.
Moreover, the survey revealed that 63% of healthcare providers reported experiencing staffing shortages within their RCM departments. This shortage further underscores the need for automated software solutions to augment existing resources and address operational challenges effectively.
The convergence of staffing shortages and the complexity of managing unorganized workflows has fueled robust M&A interest in the RCM segment. Healthcare organizations are increasingly seeking strategic partnerships and acquisitions to access advanced RCM technology, enhance operational efficiency, and navigate the evolving healthcare landscape effectively. Consequently, the RCM sector is witnessing heightened activity as market players seek to capitalize on the growing demand for innovative solutions to address critical revenue cycle challenges in the Healthcare industry. For further discussions on the evolving landscape of revenue cycle management, updates on our business initiatives, or insights into ESF Equity, LP's comprehensive advisory services and Healthcare IT M&A expertise, please do not hesitate to reach out to us.

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