As economic headwinds make small, integrated mental health deals an attractive prospect in 2023, some large vendors may choose to slow down their M&A strategy in favor of de novos.
Add-on acquisitions take time, verification and money. And in some cases, even after all of this, transactions may not meet the buyer’s expectations and never cross the finish line.
For operators looking to lock in their growth, de novos could cost less and speed up the process.
“A small business takes as much work to do as a big business to do”, Peter Nystrom,
chief commercial officer at Nystrom & Associates, said at Behavioral Health Business’ INVEST event. “You see a lot of big groups thinking, ‘Do I want to dwell on this acquisition, or step back and focus on a de novo strategy?’ Acquisitions must therefore really make sense for our groups to achieve this.
Founded in 1991, Nystrom & Associates is a behavioral health services provider with operations in Minnesota, Iowa and Wisconsin.
Public companies in the behavioral health market have also recently been evaluating build-or-buy options. In fact, behavioral health giant LifeStance Health Group Inc. (Nasdaq: LFST) is prioritizing organic growth in 2023 and more strategic mergers and acquisitions, Chairman and CEO Ken Burdick said at the press briefing. call on the company’s third quarter results last week.
“We are intentionally moderating mergers and acquisitions as we continue our transition to organic growth,” Burdick explained.
Also, ultimately, operators opting for organic growth may end up in a pretty similar place to those who acquired another business.
But a de novo will likely cost less, Nystrom said. If this trend occurs more frequently, it could lower the demand for smaller behavioral acquisitions in the future.
“I think there will be less demand for a lot of these tuck-ins,” Nystrom said. “I think sellers are going to realize that there is going to be a multiple squeeze in the near future if it hasn’t already happened.”
According to a report recently published by PitchBook, this compression has indeed started, but not because of a change in transaction activity. On the contrary, staffing issues have tempered the overall behavioral health market outlook.
“In previously hot categories such as behavioral health, multiples may begin to cool as growth slows due to staffing limitations,” the report notes.
Acquisitions also carry a degree of risk, particularly given the record valuations of 2021.
“You really have to make sure that [your dealmaking team has] does the due diligence,” William Hartje, director of development at Refresh, told INVEST. “There could be pain if you pay such high prices for something that may not be what you expected. … So I expect there will be some misfires.
Outpatient psychiatric care provider Refresh Health has more than 300 sites in 37 states. Her services include treatment for substance use disorders (SUDs), mental health disorders, eating disorders, couples therapy, psychiatry and more. In March, it was acquired by the health services division of UnitedHealth Group (NYSE: UNH) Optum for an undisclosed sum.
Going through the M&A process is a lot like dating, Nystrom said.
It takes months to build the relationship, go through the legal process and do your due diligence. That time doesn’t always pay off. But with the same amount of time and effort, a company could invest in marketing and recruiting to break into de novo, or strengthen its footprint in a market it has already entered.
“We see a significant drop in the initial interaction at [the companies] who are actually successful,” Gaurav Bhattacharyya, CEO of Geode Health, told INVEST. “Sometimes it’s just because they don’t want to. This is where the value of a prime broker process comes in handy, because you know that salesperson is motivated to move forward.
Founded in 2017 by global investment firm KKR, Chicago-based Geode Health provides in-person and virtual outpatient treatment nationwide.
When an acquisition makes sense
Strong M&A strategies can also make sense, for example when operators are trying to accelerate their expansion into new markets and capitalize on the established relationships of the assets they buy.
“For de novos to be successful, you need market reputation, you need referral ecosystem relationships,” Bhattacharyya said.
It might be easier and makes financial sense to acquire a supplier that already has those relationships, Bhattacharyya said. Since the reputation of the seller is essential, due diligence is paramount.
It’s important to start the vetting process early and spend time with a seller and their team to make sure they’re a good fit.
“We always like to get out in front of the potential seller,” Nystorm said. “We’re going to get to know them right away rather than looking at a pipeline with names on a spreadsheet saying, ‘Okay, they look good on paper, but functionally, do they look good? ‘ Are they good in person, so you can really understand the quality, what they think about moving forward [with the process]how long does the owner want people to stay in the business? »
Despite the risks of mergers and acquisitions, there are still plenty of opportunities in the mental health market, and it is unlikely to slow down significantly anytime soon.
“I think the nature of the market is that it’s extremely fragmented,” Bhattacharyya said. “And so I think the volume of transactions, if any, could increase. But they’re going to tend to be smaller, kind of real deployment opportunities as opposed to the big platforms necessarily.
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