Medical technology M&A

M&A as a driver of growth and profitability

Health care and regulatory reform, industry consolidation and convergence, and technological advances (e.g., wearable technology) continue to test the MedTech industry. However, they create both opportunities and challenges for existing business models, growth projections, and financial performance. At the same time, negative pricing trends, and stagnant health care spending have created headwinds that may inhibit MedTech companies’ ability to meet their strategic and financial goals.

In recent years, MedTech companies have looked to M&A as a key strategic lever to address these industry changes and drive stronger financial performance. Broader portfolio offerings, enhanced therapeutic solutions, international expansion and increased scale and leverage are some of the primary motivations underlying recent M&A activity.

While recent years have seen M&A transactions of significant, but varying, size (in dollars), the volume of transactions has remained relatively consistent. Additionally, many of the drivers for M&A activity in the MedTech industry remain constant. As companies consider future M&A activity, a strong understanding of premiums and value creation will be critical.

MedTech deal premiums and value creation

The continued strength of M&A within MedTech has driven deal premiums to a level that may represent an opportunity or a barrier to play, depending on a company’s financial position and risk tolerance. In fact, in recent years, the weighted average premium paid in global MedTech deals has hovered around 30 percent. Given the industry’s average growth rates of three to five percent, high premiums drive a need for significant value generation in the transaction–mostly in the form of revenue and cost synergies.

The premiums also create pressure for companies to understand the deal’s potential synergies before entering into a transaction, and to have a sound integration plan to capture identified synergies to justify the premium to the Board of Directors and shareholders.

Analysis of data from a sample of recent MedTech deals suggests “announced” synergies range from seven percent to 22 percent of the target company’s last 12 months (LTM) revenue, with a median synergy target of 11 percent. It should be noted that these are the publicly communicated goals; more often than not, companies have higher internal targets to mitigate risk in executing these synergy plans.

In many of these deals, the announced synergies are mostly cost synergies. While topline growth is often critical in transactions, companies are less likely to make public commitments to revenue synergies, as these often have a longer timeline to achieve and can be more difficult to track. For many acquirers, revenue synergies may be perceived as a potential for upside and risk mitigation to justify the deal premium.