In recent years, the healthcare sector has witnessed a significant shift in growth and profitability expectations. The focus has moved from traditional segments to more innovative subsectors like healthcare services and technology (HST). By 2028, HST profit pools are projected to nearly double payer profit pools. This transformation has prompted companies across the healthcare value chain to explore new avenues for value creation through strategic mergers and acquisitions (M&A), particularly transact-to-build M&A. This approach involves acquiring and scaling assets with unique capabilities to rapidly launch and grow new businesses, diversify earnings, and reshape core business models. The article explores the prevalence of this strategy, its benefits, challenges, and key actions for success.

The Rise of Transact-to-Build M&A in Healthcare

In the past decade, healthcare M&A activity has surged, peaking in 2021 due to favorable market conditions. However, by 2023, deal volumes had declined by about 40% amid economic uncertainties. Despite this slowdown, transact-to-build M&A remains a critical strategy for long-term value creation. In 2023, nearly half of all payer-led and hospital-led M&A deals were vertical transactions aimed at extending core businesses into adjacent service lines. For instance, hospitals focused on physician services and outpatient care, while payers targeted care-delivery segments and HST to enhance patient outcomes and process efficiencies.

Transact-to-build M&A offers several advantages. It accelerates and diversifies revenue growth by accessing faster-growing profit pools, addresses margin pressures through new capabilities, and catalyzes innovation and consumer engagement. Smaller, agile companies driving healthcare innovation are attractive targets, providing incumbents with opportunities to modernize their operations and improve patient journeys. Moreover, acquiring HST entities allows legacy players to maintain consumer relationships and mitigate disintermediation risks.

Key Actions for Successful Transact-to-Build M&A

To maximize the chances of success in transact-to-build M&A, organizations must take six critical actions:

• Set an M&A Blueprint: Develop a clear strategy that aligns potential acquisitions with overall corporate goals, avoiding impulsive reactions to market conditions.
• Build a Deal Model: Establish a target price based on a deep understanding of the asset’s business model and value drivers, ensuring realistic assumptions and a shared vision for the future combined organization.
• Define the End-State Operating Model: Articulate the desired end-state early in the diligence phase to guide integration, building, and scaling decisions.
• Plan for Additional Investments: Recognize that unlocking incremental value requires ongoing financial and human resource investments beyond the purchase price.
• Tailor Metrics to the Deal Thesis: Focus on metrics that align with strategic outcomes, allowing flexibility to evaluate high-growth, early-stage companies.
• Dedicate Time to Cultural Integration: Manage cultural differences intentionally to ensure effective collaboration and reduce friction that could hinder value capture.

By following these actions, healthcare organizations can navigate the complexities of transact-to-build M&A and position themselves for success in the evolving healthcare landscape. This strategic approach not only drives innovation and growth but also helps address margin pressures and enhances consumer relationships, ultimately leading to better health outcomes for patients.

Reflections on the Impact of Transact-to-Build M&A

From a journalist's perspective, the rise of transact-to-build M&A signifies a pivotal moment in the healthcare industry. It underscores the need for incumbents to adapt and innovate in response to shifting market dynamics. The strategic focus on acquiring and scaling assets with differentiated capabilities highlights the importance of agility and foresight in today's competitive environment. As healthcare continues to evolve, successful execution of transact-to-build M&A will be crucial for organizations aiming to thrive in the next era of healthcare transformation. By embracing this approach, companies can unlock new sources of innovation, accelerate growth, and ultimately deliver better care to their patients.