Medical technology M&A
Creating value through M&A in the medical technology industry
Medical technology (MedTech) companies entering into a merger or acquisition should explore common synergy levers and value creation best practices throughout the deal process. Uncover how to start creating value and synergies in MedTech mergers and acquisitions (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.
Download the report to learn about:
- The five common revenue synergy levers
- Key cost synergy drivers, levers, and constraints
- Making synergy and value a key part of the deal process
- Four steps to creating a post-merger integration plan
Case study: Creating value in MedTech M&A through synergy capture
A global life sciences organization completed a multi-billion-dollar acquisition of a large MedTech company to become the leading player in its market. The deal complemented the acquirer’s product portfolio, helped grow its top and bottom lines, and expanded its global presence.
Like all major transactions, the integration came with its share of issues and challenges. Not only was the organization tasked with rationalizing product portfolios, prioritizing various synergy initiatives, and maintaining business momentum while adding growth, it had to achieve all of these objectives while addressing interdependencies between functions and across 40+ countries. The organization leveraged a cross-functional model and global integration team to approach these challenges.
The integration management office provided guidance across and throughout the transaction to implement the following practices:
- Strong financial baselines and quantification of synergies in line with headcount and cost baselines
- Identification of specific value-capture initiatives with associated spend and savings (by quarter)
- Robust tracking and reporting processes to monitor synergies and costs that were embedded into financial plans and results (monthly operating reviews)
- Regular meetings and workshops to establish priority alignment and issue resolution
As a result of this approach, there was clear ownership of synergy targets and accountability for the necessary costs to achieve, as well as a defined, prioritized set of cost and revenue synergy drivers to guide value-capture execution. Specific cost-synergy-driving initiatives were centered on eliminating redundancies, enhancing productivity, and realizing efficiencies. Revenue synergy drivers included improving pricing in light of an expanded portfolio, leveraging cross-sell opportunities, and gaining additional revenue through geographic expansion. To achieve its aggressive synergy targets and fully realize the potential of the identified value drivers, the organization implemented robust tracking and reporting tools, as well as recurring synergy performance assessments, to inform decision-making, identify and mitigate risks, and prioritize integration actions and expenditures.