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www.openminds.com n 15 Lincoln Square, Gettysburg, Pennsylvania 17325 n 717-334-1329 n [email protected]
Finding The Right Partner: A Guide To Starting The Merger, Acquisition & Affiliation Process For Non-Profit
Organizations
T h e 2 0 1 9 O P E N M I N D S S t r a t e g y & I n n o v a t i o n I n s t i t u t eJ u n e 4 , 2 0 1 9 | 2 : 3 0 p m – 3 : 4 5 p m
J o e N a u g h t o n - T r a v e r s , E d M , S e n i o r A s s o c i a t e , O P E N M I N D S
© 2019 OPEN MINDS
AgendaI. Why Mergers & Acquisitions
II. Best Practices Steps To Merger & Acquisition Process
III. Case Studies
Joe Getch, MBA, MS, Chief Operating Officer, PRS, Inc. & Wendy Gradison,
LCSW, President & Chief Executive Officer, PRS, Inc.
Frank Baumann, Chief Operating Officer, BayMark Health Services, Inc.
Regina Widdows, President & Chief Executive Officer, SERV Behavioral Health
Systems, Inc.
IV. Questions & Discussion
2
© 2019 OPEN MINDS© 2019 OPEN MINDS
Why Mergers & Acquisitions?
3
© 2019 OPEN MINDS
Mergers & Acquisitions On The Rise!
Health care M&A activity continues to grow
• 14.4% growth from 2017 to 2018 in health care
M&A activity
• 52.6% growth in the volume of behavioral care
mergers in 2018—the highest growth among
all health care sectors
• 30% of all M&A activity in the health care
sector in 2018 was related to long-term care
facilities
Consolidation has been
seen by many CEOs as a
strategy necessary for long-
term survival given the
changing environment in
health and human services
– including more value-
based reimbursement,
more managed care, and
decreased funding.
© 2019 OPEN MINDS
Economies Of Scale
The phenomenon that production becomes more efficient as the number of goods
being produced increases.
Larger organizations have the ability to lower their cost per unit – thanks to the ability to
spread their overhead expenses over a larger number of units.
Size doesn’t matter without strategy - there are many models that can achieve
economies of scale, but your path to collaboration needs to be part of an overall long-
term sustainability strategy.
“There is nothing so useless as doing efficiently
that which should not be done at all.”
– Peter Drucker
© 2019 OPEN MINDS
Market Drivers Of Consolidation
What’s driving the push for economies of scale?
Consolidation among health plans and health care systems creates new competitive pressures in the rest of the health and human services market
Use of competitive bidding and selective contracting
The cost of competition “Narrow networks”
Reimbursement models focused on value-based payment methodologies
Pay-for-performance and risk-based contracting
New infrastructure needed Increased financial risk requires
finance reservesAbility to cover more consumer
services and wider geographic area
Preference for delivery models that focus on the coordination of services for complex consumers
ACOs and medical homes – “new carve-out” is by consumer type Challenge for specialists and acute care facilities
© 2019 OPEN MINDS
Size Alone Is Not A Solution
Larger organizations can spread the “overhead costs” for technology, financing expenses, compliance, marketing, legal counsel, and other core competencies over a larger revenue base – which in many cases gives them a lower unit cost.
However, not all of the “large” organizations that are a result of these mergers and acquisitions are doing well –either from a service delivery perspective or a financial perspective.
© 2019 OPEN MINDS
Being Big Isn’t A Strategy
In maintaining competitive
advantage in a changing market,
size and scale are just part of the
equation
A large organization that is unwilling
or unable to adapt to a changing
marketplace is just as susceptible to
failure as a small organization
© 2019 OPEN MINDS
Benefits Of A Merger
Increase financial strength
Continuation and/or expansion of programs
and servicesIntegration of services
Reduced operational costs
Reduced donor fatigue with fewer organizations
asking for money
The opportunity to rebrand
Expansion of geographic/demographic
reach
Elimination of a competitor for funding
Elimination of perceived duplication of services
Address delivery weaknesses
Open the door to new ideas and innovation
© 2019 OPEN MINDS
Risks Of A Merger
Negotiations may ultimately fail
Merged organizations may prove
incompatible, never achieve a successful
integration
Cost savings may never actually
materialize
Tensions between leadership and
personnel may never subside and
eventually will interfere with operations
The public, constituents, and donors may
have a negative reaction
4. A tendency to look at mergers reactively, as a way out of financial or leadership problems – instead of
proactively, as a growth and positioning strategy
3. A failure to find the right partner to merge
2. A lack of funding for due diligence and post-merger integration
1. A lack of knowledge about how to approach, plan, and implement mergers
Top 4 Reasons Why Mergers Fail:
© 2019 OPEN MINDS© 2019 OPEN MINDS
Best Practices Steps To Merger & Acquisition Process
© 2019 OPEN MINDS
Two Typical Approaches – Planned & Organic
The Planned Merger/Acquisition Process
Formal process of defining the criteria for the merger partner and then seeking out providers that fit that criteria.
It is a very active process of seeking potential partners, vetting them, and proceeding with the merger/acquisition process.
The ”Organic” Merger/Acquisition Process
This are opportunities that present themselves, not the result of a formal search process. For example:
• Other providers actually seeking to be acquired contacting your organization.
• “Failing” providers who may not be able to continue to operate services.
• CEO retirements leading the board of directors to consider mergers.
• While the opportunity may be organic, rather than a formal search process, the vetting and due diligence process should be the same.
© 2019 OPEN MINDS
Step #1: Identify Merger Candidate Organizations
What is the profile of an ideal provider for consideration for a merger?
• For-profit or not-for-profit
• Size in terms of revenues
• Geographic location(s)
• Service lines
• Clinical specialties & expertise
• Key contracts, provider numbers, licenses, etc.
Identify provider organizations that meet the target criteria.
Determine how to approach and contact target organizations.
© 2019 OPEN MINDS
Step #2: Initiate Discussions with Target Organizations (”Dating Phase”)
Non-disclosure agreements are usually signed.
May have agreement of ‘exclusivity’ for a specific time period during this dating phase.
Key objective is to determine if the merger is a reasonable possibility for both
organizations.
This Dating Phase should not go on forever. The parties should be able to determine
whether or not there is a likely fit within months, not years.
© 2019 OPEN MINDS
The Deal Breakers: Three Key Issues
Chief Executive Officer
• Who will be the surviving CEO?
Name
• What will be the name of the surviving organization?
Board of Directors
• What will the composition of the board of the merged organizations?
© 2019 OPEN MINDS
Step #3: Signing the Letter of Intent to Merge (“Engagement Phase”)
At this point, the executives and board of directors have agreed to a merger pending
the due diligence process.
The Letter of Intent usually includes key areas of agreement and a specific time frame
to complete the due diligence and make a final decision to execute the merger.
© 2019 OPEN MINDS
Step #4: Conducting Due Diligence (”Investigation Phase)
This is the phase where a thorough due diligence is conducted and documented.
There are two key goals here:
• Ascertain that there are no problem areas that would make the merger/acquisition a bad
idea.
• Determine financial feasibility of the merger/acquisition.
• Typically, this due diligence process can be completed in 60-90 days.
• The complete findings of the due diligence process should be presented to the
executives and boards of directors so a final decision can be made about where to
proceed with the merger/acquisition.
© 2019 OPEN MINDS
Step #5: Develop & Execute The M & A Agreement (“Pre-Nuptial Phase”)
This is the legal phase of the process.
It may also involve getting approval for the merger/acquisition from appropriate parties.
© 2019 OPEN MINDS
Step #6: Implement The Merger/Acquisition (“Marriage Phase”)
The final steps are to actually complete the merger/acquisition and move on the all of
the steps of integration.
© 2019 OPEN MINDS
Important Questions To Consider
Is your organization looking to acquire or be acquired?
Does the potential partner organization fit with/support our mission?
Do I have a strategic reason for this merger or are we growing for growth’s sake?
Have we done our homework on the other organization?
What will we gain toward the accomplishment of our immediate and long-term goals?
How will a merger be perceived by the public, our financial supporters, payers, and
consumers?
© 2019 OPEN MINDS
More Questions
Can we afford the acquisition or merger? How will it be funded?
Will the combined organizations have the resources to address the needs of both
organizations?
Is my board fully bought into this and willing to actively participate?
© 2019 OPEN MINDS© 2019 OPEN MINDS
PRS, Inc.
Joe Getch, MBA, MS, Chief Operating Officer
Wendy Gradison, LCSW, President & Chief Executive Officer
22
Finding The Right Partner: A Guide To Starting The M & A Process For Non-Profit Organizations
OPEN MINDS Strategy & Innovation Institute
June 4, 2019
New Orleans, LA
Strategy.openminds.com
Wendy Gradison
• President and CEO of PRS, Inc.
• Licensed Clinical Social Worker
• CEO since 1998 – succeeded founder who formed PRS in 1963
• 703-531-6300
Joe Getch
• Chief Operating Officer
• MBA; MSA; BS Economics
• CARF Administrative Surveyor
• 14 years in behavioral health environment
• 703-531-6306
About PRS, Inc.
• Founded in 1963
• Provide behavioral health, crisis intervention and suicide prevention services throughout Northern Virginia and Washington DC
• Services include:• Employment Services
• Community Support Services
• Recovery Academy Day Program
• CrisisLink 24/7 suicide prevention hotline and textline
The Merger Process – First steps
• Preliminary conversations
• Preliminary fact-finding – cursory data collection, discussion and analysis. Any obvious deal breakers?
• Making the initial case – gaining support of senior leadership and Board to begin a more formal process
• Coming together and forming the merger team
The Merger Process – Due Diligence
• Develop a blueprint of the merged organization
• Negotiation, hammering out the details• Agreement of what success of a merger would look like
• Who will make up senior leadership
• Conditions that must be met for both sides to agree to merge
• What are the deal breakers?
• Legal review
• Internal and external stakeholder buy-in
Conditions that must be met – deal breakers
• Missions preserved for each organization?
• Continuity of all current services?
• Who makes up the senior leadership?
• Board Governance approach, leadership and membership?
• What you are not willing to lose?
Areas of focus/committee work
• Operations
• Finance
• Corporate Structure/Membership
• HR
• Linking Missions
• Resource Development
• Programs/clinical philosophy and approach
• Policies and Procedures
Seal the Deal/Implementation
• Communications plan
• Integration of staff, Board and volunteers
• Vendor contract cancellations
• Final audits
• Integration of payroll, accounting, IT, etc.
Lessons Learned
• Organizational culture shift – managing change is not easy. There will be fallout.
• Culture change and integration can take years.
• Mergers include losses for many people.
• Organizations that can benefit from a merger may have multiple serious management deficiencies that hit HR, IT, Finance, supervision, accountability, etc.
• Despite due diligence, issues will emerge over time that are not anticipated. Expect some of these issues.
• Must continue to drive the car while changing the tires.
Lessons applied to next merger process (merger of equals)
• If you’ve seen one merger you’ve seen one merger!
• There will always be winners and losers and LOSS to pay attention to and honor
• Acquisition vs. merger of equals raises unique issues
• Awareness of each culture and how to meld key
• Awareness of each clinical approach to the work and how to meld
QUESTIONS?
© 2019 OPEN MINDS© 2019 OPEN MINDS
BayMark Health Services, Inc.
Frank Baumann, Chief Operating Officer
35
Frank Baumann, COO
The Leader in Outpatient Opioid Addiction Treatment
37
What We Do
BayMark Health Services is dedicated to providing individualized treatment services for those struggling with addiction. In response to the nationwide opioid crisis, BayMark is focused on increasing accessibility to comprehensive medication-assisted treatment in a variety of settings including:
• Methadone & Buprenorphine Maintenance Treatment provided in a structured Opioid Treatment Program (OTP)
• Buprenorphine/Suboxone® Maintenance Treatment in an office-based opioid treatment (OBOT) setting
• Ambulatory Withdrawal Management Services with naltrexone and Vivitrol® Therapy
• Inpatient Withdrawal Management Services and medical stabilization services provided in a hospital setting
38
Who We Are
• Leader in outpatient opioid addiction treatment
• Largest provider in North America
• Serve more than 52,000 patients daily nationwide
• Treatment Brands include AppleGate Recovery, BAART Programs,
Canadian Addiction Treatment Centres, Health Care Resource
Centers, Recovery Services of New Mexico, The Coleman Institute
& MedMark Treatment Centers, Special Care
39
Acquisitions
• Focused on strategic acquisitions in addiction services with focus
on OUD.
• Grown largely through acquisitions. In 2006 we made our first
addiction acquisition of four Opioid Treatment programs. We now
have 223 treatment locations.
• One of the most active acquirers of addiction programs.
• Completed 19 acquisitions since October 2016.
• Currently have management agreements with two non profit
organizations.
• Currently in discussions with three non profit organizations.
40
Identifying Potential Partners
• Geography
• Demographics – Ability to Grow Services
• Complementary Treatment Philosophy
• Will the Relationship Benefit both Parties?
• Reputation
• Relationship with Regulators
• Stable or improving regulatory and reimbursement environment
• Synergies
• Fit, Flexibility and Continuity of Leadership team
• No immediate financial crisis
41
Caution Signs
• Unwilling to Share Information/Full Disclosure
• Unwilling to Provide Access to Key Consultants / Senior Staff
• Uncooperative with the Due Diligence Process
• Unable to Complete Due Diligence Process
• Uncover Significant Reduction in Services
• Determine Not Yet Ready for Transition
• Uncover Consistent Litigation Activities
• High Staff Turnover
• Consistent Inability to Hit Targets
• Competitors are Taking Market Share
• Communications Slows Down
© 2019 OPEN MINDS© 2019 OPEN MINDS
SERV Behavioral Health Systems, Inc.
Regina Widdows, President & Chief Executive Officer
42
43
Regina Widdows
CEO & President
June 4, 2019
44
SERV Centers of New Jersey, Inc.
SERV Achievement Centers, Inc.
SERV Properties & Management, Inc.
SERV Foundation, Inc.
45
SERV Centers of New Jersey, Inc.
◦ Residential
◦ Partial Programs
◦ Outpatient Sites
◦ Certified Community Behavioral Health Clinic
SERV Achievement Centers, Inc.
◦ Residential
◦ Partial Programs
◦ Foster Care Programs
◦ Behavioral Support Services
46
SERV Properties and Management, Inc.
◦ Property Management
◦ Fleet Management
◦ Construction Management
SERV Foundation, Inc.
◦ Fundraising
◦ Brand Awareness
◦ Scholarships
47
CEO/Executive Staff prepare the preliminary
acquisition/affiliation strategy.
Evaluation of current organization as proposed with
SWOT Analysis.
Evaluation of organization as proposed with SWOT
Analysis.
Clear articulation of purpose and intent of
merger/affiliation.
48
Board’s involvement in the process is mandatory.
Board must review, understand, approve, and monitor
implementation of the plan.
While management prepares the plan, the Board has
overreaching oversight responsibility with respect to
plan development and execution.
49
Is it consistent with the organization’s mission?
Is it consistent with the mission of the affiliate?
What are the factors motivating the organization and
the proposed partner?
What are the projected economic, clinical, geographic
and stakeholder considerations?
What are the risks and opportunities?
50
Built Infrastructure Access to Care Department
Human Resources Department
Corporate Compliance Plan
Strategic Planning
Board Governance
(1) SERV Behavioral Health Board
(4) Operating Boards
Board Committees
Personnel
Finance
Compliance
Investment
Executive
51
Fulfillment of greater mission/value
Expansion of Continuum of Care
◦ Peer Support Services
◦ Outpatient Services
◦ Substance Use Services
◦ Crisis Programs
◦ Recreational Programs
52
Geographic Expansion
◦ Deliberate hubs of services
Access to Payors/Grants
◦ Contracts
Outside Factors
◦ Reimbursement
Fee-For-Service Transition
Pay For Performance
Risk Based Contracting
53
Expect the unexpected
Over-communicate on all levels
Know when it is not a good fit
Board participation is critical
Manage Expectations
54
Thank You!
© 2019 OPEN MINDS© 2019 OPEN MINDS
Questions
55
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