"In my experience as an M&A attorney at Posternak, I have seen many acquirers come to a deal with solid plans, and requisite experience, leadership and resolve succeed in even the most difficult of circumstances."
Kevin O’Connell is a partner in Posternak, Blankstein & Lund LLP’s corporate department and chairs the Health Technologies Group. Located in Boston. he maintains a sophisticated and diverse practice with particular focus on transactional representation, including mergers and acquisitions, divestitures, the structuring of joint ventures and strategic relationships, and angel, venture, private equity and other financings.
PBN: It's a broad question, but is there anything you can generally say about the state of mergers and acquisition?
O’CONNELL: From my perspective, as an adviser principally to New England-based middle market businesses, things are good and I sense they are going to get better. Strategic investors are still hoarding cash, but we are seeing plenty of deal activity. At Posternak, we are actively working with clients on both the buy side and sell side. The transactions continue to take longer to process when compared to, say, five years ago, due to the more deliberate approach taken by buyers and their lenders, but good deals are getting financed and closed, and though we may not soon, if ever, see the “go-go” days of ten years ago again, the mergers and acquisitions marketplace continues to climb out of the abyss of 2008-2010.
PBN: Several local banks have recently acquired other, smaller banks, thus getting larger. What does that mean for the banking industry five years from now?
O’CONNELL: I call this the “commoditization” of the banking industry. Early in my legal career, banking was a relationship business. Bankers were chosen by business owners as much for how they might “fit” personality-wise or experience-wise into the business owner’s team of advisers, along with the lawyer, the accountant and the like. Now, banking is a bottom-line business and the executives who run banks answer to shareholders looking for returns. As banks grow larger, they compete with each other more and more for customers’ business on rates and other terms. Some businesses may benefit from competition that results in lower interest rates, for instance, but in my view, the smaller and middle-market companies will suffer. The local banker who knows the business inside out, steps in to extend credit to his customer, works to avoid a default or similar, is a dying breed, and may very well be extinct in five years.
PBN: Is the Steward acquisition of Massachusetts hospitals a feasible model?
O’CONNELL: In my experience as an M&A attorney at Posternak, I have seen many acquirers come to a deal with solid plans, and requisite experience, leadership and resolve succeed in even the most difficult of circumstances. Steward seems to have all of this and something more - private equity backers. Steward and its investors have stepped in a big way and have moved very quickly at a time when the future direction of the hospital industry is up in the air.
The model of consolidating community hospitals in relative geographic proximity to each other and coordinating service offerings, such as the limited network product Steward started offering earlier this year through Fallon Community Health Plan, certainly makes sense to me. I hear from many of my business clients about the challenges of rising health care costs, and Steward’s model aims to ease that pain, so I think there is certainly good potential for success.
PBN: Why didn’t it work at the Landmark Medical Center?
O’CONNELL: In any transaction, the buyer needs to understand the seller’s receivables and cash flow situation, and the seller needs to feel comfortable with the buyer. I know from media reports that regulators had some tough questions for Steward regarding its finances, and Steward was looking at a hospital embroiled in a dispute with a large insurer regarding reimbursement issues – all of which is bound to slow things down. Any number of those issues, and an almost infinite number of others, could make either side think again and derail a merger permanently.
PBN: Would you say that mergers and acquisitions are becoming more preferential to businesses than loans to upgrade or construct new facilities?
O’CONNELL: As a general rule, there isn’t one manner of expansion business owners prefer over another. My most successful clients are good at continually assessing their needs and keeping an eye out for opportunities to help them meet those needs. If a company in their industry is on the ropes, that might be an opportunity to buy the company or begin merger talks, or if a nearby parcel of property comes on the market, it might represent a chance to consider plant expansion. But, if I can help it, none of my clients ever underestimates the culture change and shock that can come with a major M&A transaction – it is not something any business owner should enter into without significant forethought and planning. If you build a new building for your employees, everyone eventually will get used to the new elevators, whereas if you merge your company to get some new office space that you covet and some of your old team is answering to a new boss or fearing an imminent downsizing, you may have caused more problems than you’ve solved.