Will Stock Market Fluctuations Slow Healthcare IT Consolidation?

As any financial page reader knows, the stock market has been through a series of wild rides in the last two months. The mortgage credit crisis has sent shock waves through Wall Street. There has even been talk of the “R” word -- recession.

Will these fluctuations in the stock market bring an end to the strong wave of mergers and acquisitions in the healthcare technology industry?

In short, no. Although the Dow Jones’ gyrations have jeopardized several mega size M&A deals and depressed the stock of a number of leveraged buyout firms, we have not seen a major impact on the healthcare technology sector.

Looking ahead, while a handful of pending deals, ones dependent upon large amounts of private equity, may get postponed, the overall healthcare M&A market will not be significantly impacted by the stock market turmoil for several reasons.

First, the majority of the M&A transactions in healthcare have been in the small-medium company market. In these deals, smaller, faster-growing companies are generally the targets of a strategic buyer.

These buyers are not relying on a large amount of financial leverage to provide their returns like the major private-equity players who are the subject of so much attention in the business media. Instead, these companies are seeking to enhance their current product suite in order to make them a more competitive solution or a one-stop shop for their customers.

Second, valuations in the healthcare technology and services sectors remain strong. We can look at the recent acquisition of Dade Behring Holdings by Siemens Medical Solutions, where the purchaser paid a 20% premium over the current stock price. In another deal, Perot Systems announced it will acquire software services vendor JJWild in an $89 million deal, also showing a very strong valuation for the seller.

The majority of investors continue to view the healthcare industry as a defensive play. Spending on healthcare, both private and public, is projected to continue to increase in coming years.

As a result, we believe the overall number healthcare technology M&A deals will match or even exceed the 2006 pace, when there were 471 merger and/or acquisition deals in the sector. The overall M&A dollar amount, however, will probably be smaller because of fewer multi-billion dollar transactions.

Even if the nation experiences a decline in consumer discretionary spending, perhaps one caused by a deflated housing market, we believe healthcare technology companies will remain attractive acquisition candidates. The Dow Jones Industrials may not be going higher, but median age of the U.S. population definitely is. Our nation is going to need more healthcare, not less, in the coming years.

That translates into continued strong interest among growth-oriented companies in acquiring smaller, leading edge players who are delivering new services and technologies.


David Kauppi is a managing director of Chicago-based MidMarket Capital Inc., which provides investment banking and M&A advisory services to healthcare, IT and consumer products companies. For more information see www.midmarkcap.com.

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