Avoiding an Ill-Planned Merger
by Nick Hernandez, MBA, FACHE
Running a practice is an ongoing process aimed at optimizing an existing set of circumstances. Merging two physician groups is a temporary process aimed at changing those circumstances. Running a practice is a recurring evolution. Acquiring or merging is a finite revolution. The two have different objectives and require different approaches altogether.
Ideally, integration insight is woven into virtually every step of the acquisition process. It is incorporated into the strategic thinking and target identification, into the due diligence and the valuation process. It plays a huge role during the months before and after closing. And it carries on long after the deal is done and the bankers and lawyers have all gone home. Thinking about integration at every step in the deal process will help physician groups avoid transaction failure. Acquiring another practice can be a powerful tool for your group to achieve growth and build long-term value. There are, however, a few key mistakes that are often made which could be avoided with more thoughtful reflection.
1. Failing to define a vision—before the integration occurs.
Crafting a vision that clearly spells out the opportunity inherent in the transformation ahead should, but often doesn’t, start long before a deal is pursued. Drawing from an "expanded due diligence" process that explores quantitative metrics, like physician group operations and financials, as well as the people and culture of the merged entity, is key. Leaders must build and communicate a vision of success that is understandable, tangible, and compelling to employees throughout the ranks of both practices. Factoring in in the value of the people, assets, and cultural elements of each practice will empower leadership to look beyond the basic additive advantages of the deal and construct a more holistic vision—inspired by both head and heart—for the opportunity ahead.
2. Forgetting to ask, “What more could we become together?”
The single biggest pitfall that derails successful transactions occurs during the actual integration process. Those involved often focus too heavily on ensuring the tactical aspects of the deal are covered, including technology integration, financial reporting, operations, and merging organizational structures. The real power of any physician group merger comes from both practices challenging each other to ask, “What more could we become together?” How can each practice learn from the best of each respective practice and let go of old biases? This will build the two parts into a better whole. Viewing the integration process through this lens will help build collective urgency and alignment around shared goals and generate excitement among employees for the new entity’s future.
3. Underutilizing your people to drive change.
Throughout the merger integration process, leaders at each practice should deliberately involve staff from throughout the practice to help facilitate change. The practices should empower employees at all organizational levels to join and lead a volunteer army to accelerate the transference of ideas and inspire the desired culture of the new combined practice. With so many moving parts throughout the process, empowered employees working as informal networked groups can work with agility and adaptability to help the two physician groups gradually become one.
One simple but effective way to ensure a successful acquisition is to study why others have failed and do something different. Here are nine common root causes of failed acquisitions.
1. Strategy: Poor strategic logic or fit. No strategy used to determine goals of integration.
2. Synergy: Overestimation of potential synergies, or underestimation of synergy complexities or timetable to delivery.
3. Culture: Fundamental incompatibilities (including buyer’s lack of self-awareness), ineffective integration, or squelching positive attributes of target’s culture in name of uniformity.
4. Leadership: Weak leadership, delays in appointing new leadership team, loss of key talent, insufficient participation in the transaction and integration process, ego clashes, or failure to deliver on pledges.
5. Transaction parameters: Overpaying, inappropriate deal structure, or endless negotiations which bleed both practices dry.
6. Due diligence: Insufficient investigation (especially little or no strategic and operational due diligence), or failure to translate findings into actions.
7. Communications: Failure to communicate with sufficient transparency, awareness, depth or frequency, failure to take key messages to appropriate stakeholders, failure to address the concerns of each group with targeted yet strategically consistent messaging, or making empty promises.
8. Key talent: Failure to identify key personnel or failure to act swift enough to retain them.
9. Technology: Failure to identify fundamental incompatibilities (poor due diligence) or underestimating complexities or time required for system integration.
So, how can you avoid these problems? Successful acquirers embrace the process of integration as the single-most powerful value creation tool available, and view their investment in integration as one of the elemental costs of doing a deal. And, they understand that integrating and operating are two different processes, with unique objectives and requiring separate attention and separate skills.
Post-merger integration
Closing the deal is a major milestone, but it’s the post-merger integration process where the real value is created. It may be difficult to believe, but the post-merger integration can be even more complicated than the deal itself. Communication is critical during the post-merger integration process, and the two groups need to share documents easily. Information must be transitioned seamlessly throughout and the whole integration process has to meet physician owners’ expectations for key timelines and capturing synergies in growth and costs.
Conducting post-merger integration at a high speed is one of the most critical elements to a deal’s success. Taking proactive action within the first 100 days post-closing can significantly realize deal synergies. Practice administrators working in concert with a seasoned consultant must develop a well-structured plan for their post-merger integration efforts to vastly improve their odds for a successful outcome.
The complexities of integration
Many physician owners spend months of time and effort closing merger transactions but stumble when it comes to integration. Oftentimes, buyers significantly underestimate the level of involvement in a successful integration effort. Common mistakes include:
Failing to properly assess the resources to integrate and operate two businesses
Not addressing “people issues” and cultural differences of the physician groups
Losing focus after the signing of a deal
Not acting promptly, allowing key personnel to leave both organizations
Overloading management with integration responsibilities outside their scope of expertise
These mistakes lead to a lack of synergies and a significantly slower integration effort. This lack of speed during integration tends to compound the mistakes.
Speed is of the essence
Physician groups that move slowly during the integration process are vulnerable both financially and competitively. The announcement of a merger between two groups creates uncertainty among employees of both organizations and fuels anxiety-filled discussions about who will stay and who will be let go. Without proactive and effective communications, employee morale will suffer. Even worse, those key employees that you hope to keep may jump ship to competitors or other organizations.
The turbulence of an announced merger can give competitors a perfect opportunity to call on your referring physicians and even patients. The community at large can spread all kinds of unconfirmed “alternative facts.” A slow response to retention initiatives (retention of employees, patients, and referring physicians) during a merger can leave competitive doors open too wide for too long. Decision-making must be streamlined for the integration effort to move forward. The completion of a few “quick win” integration tasks will bolster confidence in the team leadership and keep the process moving forward. For example, one of the first things to accomplish is a staff meeting to discuss key human resource issues such as payroll schedule and benefits transition.
A plan of action
Strategic integration decisions should be put in place prior to the completion of due diligence because these strategic decisions may influence the deal terms and structure. It’s important to identify these details and include them into the deal agreement before closing. Ideally, a 100-day integration plan is implemented when the deal closes. This should include identifying tasks to be completed, known issues, milestones, and planned timelines for completion.
Following the deal’s closing, detailed planning sessions should begin with functional department members of both practices. In the beginning stages, joint meetings are essential to establish relationships between representatives of both practices. Once initial on-site discussions are completed, subsequent discussions leveraging virtual meeting technology can take place. The two together will result in more efficient time utilization and reduced travel costs.
If you think of a physician group merger as a marriage, then you can see there is still a lot of work left to do after the wedding date, or day 1. Yes, it’s the day in, day out effort of the marriage that takes patience and thoughtfulness—and also tends to get messy. Compared to a marriage, the wedding is easy. Post-merger integration is critical to realizing the value of a deal. It’s also highly complex, taking place under severe time pressure, and happens in parallel to running the core business—making it one of the most challenging initiatives physician owners and practice administrators will ever undertake.
What’s the secret to post-merger integration success? Focus on the strategic objectives of the deal, accelerate synergies, and build a high-performance medical practice.
Nick Hernandez, MBA, FACHE
Nick is the CEO and founder of ABISA, a consultancy specializing in strategic healthcare initiatives for physician practices. His firm helps devise and implement strategies that will allow practices to remain competitive and solvent.