By the Numbers

Success factors for making mergers work

Here are eight important areas that can affect the success or failure of a practice merger.

“When you see a merger between two giants in a declining industry, it can look like the financial version of a couple having a baby to save a marriage.”
– Adam Davidson

“Every single time you make a merger, somebody is losing his identity.”
– Carlos Ghosn

“By all means, merge. If you get a good practice partner, you’ll become happy. If you get a bad one, you’ll become a philosopher.”
– (With apologies to Socrates)

Ophthalmic practice mergers and consolidations are nothing new. They have certainly never been easy. But the pace of mergers, acquisitions and alliances is accelerating, in all their various forms:

  • Loose alliances to share resources or boost contracting clout.
  • Peer practices joining forces to share increasing regulatory and cost burdens.
  • Large practices absorbing smaller ones.
  • Retinal practices vertically integrating with generalists to secure their referral base.
  • Private equity firms aggregating private practices into regional super-groups.
  • Practices joining health systems and multispecialty clinics.

Only a minority of practices that enter discussions to aggregate in some manner ever consummate a meaningful transaction. Failed consolidation efforts are a major drain of practice resources: meeting time, the cost of expert support and the emotional toll of being “left at the alter” without a deal.

Here are the most prominent alliance, merger and consolidation success factors based on my 40 years of experience in this sphere:

1. Motivation and emotional commitment: Two key (if somewhat unsavory sounding) consolidation success factors come down to us from Wall Street: “fear” and “greed.” Either emotion (or both combined) can get parties to the negotiating table much faster than dry financial forecasts. Will being part of a larger group feel safer and more secure? Do you believe that being a partner in a larger practice will give you a net pay raise? If so, the odds of success go up. If you are a doctor or administrator or consultant leading a consolidation exploration between two practices, ask yourself: “Are the principals emotionally attached to a favorable outcome?” Bloodless, lukewarm merger deliberations almost always fizzle out.

2. Simplicity at the outset: It is common for Drs. A and B and C and D, in four different practices, to get excited at the prospect of all coming together as a single enterprise. But merger explorations fail logarithmically faster the more parties there are in the discussion. It is far more effective for A and B to merge, and then transact with C, and then transact with D.

3. Leadership: I have never seen a merger transaction go forward because every doctor and every administrator got in a room, got on the same page and figured things out. Transactions are more often driven by a single leader — a physician-owner, a lay administrator or an outside adviser. And not only is the demand for leadership present at the front end of the deal, there has to be a lay leader and a medical leader (a so-called dyadic leadership model) to carry the conjoint enterprise forward, especially in the formative months and years. The “leadership quotient” required to run a practice rises sharply with practice scale.

Consider the challenge if three small practices economically integrate into a larger group. It is likely that every one of the pre-merger constituent practices had at least one doctor-owner or lay manager with the time and skill to lead their smaller group. But the odds are much lower that even one of the doctors or managers in the combined company has the chops to run a much larger practice. Before merger discussions get very far, a natural leader should be emerging. If not, take a pause and discuss this prominent gap as a group.

4. Followership: In addition to a willing and capable leader, a group of doctors exploring a merger project requires effective followers. What does this mean? Being supportive of the agreed leader and not tearing them down with petty criticisms. Being abundant with praise and lenient in reprimanding. If you have ever been in a leadership position, you know the phrase, “It’s lonely at the top.” This is especially the case over the course of a protracted practice merger effort to draw divergent, even nominally competitive, parties together.

5. Advance planning: Especially in settings where there is to be full operational and economic integration between constituent practices, the granular details and plans for execution have to written down and approved by both the doctor principals and the senior administrative staff of each practice. Which computer software platform will be used? What will be the new, combined staff benefits? Whose attorney is going to be kept on as general counsel? It is a long list.

6. Accretion: The best transactions, whether mild alliances or full economic integration, are reciprocally accretive to the earnings of all of the involved principals. Said more simply, in the best and easiest deals, every owner gets a nominal pay raise — sometimes immediately, more often in future years.

7. Financial awareness: Both before and after a deal, the parties need to examine (and have their advisers examine) trusted financial and volume performance data from each constituent party and be able to a) forecast whether a given proposed transaction is likely to be accretive and b) ascertain if the forecast was indeed correct post-transaction.

8. Tempo: Time is not a friend of merger-consolidation efforts. Discussions that drag on generally collapse. You can help prevent this by setting deadlines for each of these eight major nominal stages of merger-consolidation:

  • Complete informal “what if” discussions.
  • Establish a formal exploratory task force, composed of representatives from each practice and whatever outside professional advisers they select.
  • Execute a nonbinding letter of intent spelling out generalized, prospective merger terms.
  • Exchange and review financial and volumetric data and forecast the expected benefits of merging.
  • Expand disclosure and due diligence activity (compliance, quality assurance, utilization, malpractice history).
  • Prepare and agree on a formal operations integration plan.
  • Prepare a longer-term business plan for the combined practice.
  • Draft and execute the definitive agreements (then the real work starts!).

Before and after the transaction

Keep these success factors in mind as you and your colleagues proceed together. Ask yourself as an individual as well as a member of one of the constituent groups, “Is there anything I can be doing to help this process?” Examples include:

  • Helping to choose and support the emerging leaders of any collaborative effort, whether they are on your side of the deal or the other side.
  • Encouraging your practice’s managers to provide data and participate in good faith in the early “what if” discussions.
  • Responding briskly to requests for input or data.
  • Attending any meetings that may be called.
  • Insisting on personally understanding any emerging financial analysis, which will not only be critical to making any merger work, but critical to your personal success post-transaction.

So much for the complex, stepwise success pathway going into a merger. What are the signs that your merged practices have actually become more successful by joining forces? The answers here are far less complex: Patients are better served. Staff are happier. The combined practice is stronger financially. You are growing and gaining market share at a faster pace. The doctors and managers, alike, are in greater control of your company’s future.

“When you see a merger between two giants in a declining industry, it can look like the financial version of a couple having a baby to save a marriage.”
– Adam Davidson

“Every single time you make a merger, somebody is losing his identity.”
– Carlos Ghosn

“By all means, merge. If you get a good practice partner, you’ll become happy. If you get a bad one, you’ll become a philosopher.”
– (With apologies to Socrates)

Ophthalmic practice mergers and consolidations are nothing new. They have certainly never been easy. But the pace of mergers, acquisitions and alliances is accelerating, in all their various forms:

  • Loose alliances to share resources or boost contracting clout.
  • Peer practices joining forces to share increasing regulatory and cost burdens.
  • Large practices absorbing smaller ones.
  • Retinal practices vertically integrating with generalists to secure their referral base.
  • Private equity firms aggregating private practices into regional super-groups.
  • Practices joining health systems and multispecialty clinics.

Only a minority of practices that enter discussions to aggregate in some manner ever consummate a meaningful transaction. Failed consolidation efforts are a major drain of practice resources: meeting time, the cost of expert support and the emotional toll of being “left at the alter” without a deal.

Here are the most prominent alliance, merger and consolidation success factors based on my 40 years of experience in this sphere:

1. Motivation and emotional commitment: Two key (if somewhat unsavory sounding) consolidation success factors come down to us from Wall Street: “fear” and “greed.” Either emotion (or both combined) can get parties to the negotiating table much faster than dry financial forecasts. Will being part of a larger group feel safer and more secure? Do you believe that being a partner in a larger practice will give you a net pay raise? If so, the odds of success go up. If you are a doctor or administrator or consultant leading a consolidation exploration between two practices, ask yourself: “Are the principals emotionally attached to a favorable outcome?” Bloodless, lukewarm merger deliberations almost always fizzle out.

2. Simplicity at the outset: It is common for Drs. A and B and C and D, in four different practices, to get excited at the prospect of all coming together as a single enterprise. But merger explorations fail logarithmically faster the more parties there are in the discussion. It is far more effective for A and B to merge, and then transact with C, and then transact with D.

PAGE BREAK

3. Leadership: I have never seen a merger transaction go forward because every doctor and every administrator got in a room, got on the same page and figured things out. Transactions are more often driven by a single leader — a physician-owner, a lay administrator or an outside adviser. And not only is the demand for leadership present at the front end of the deal, there has to be a lay leader and a medical leader (a so-called dyadic leadership model) to carry the conjoint enterprise forward, especially in the formative months and years. The “leadership quotient” required to run a practice rises sharply with practice scale.

Consider the challenge if three small practices economically integrate into a larger group. It is likely that every one of the pre-merger constituent practices had at least one doctor-owner or lay manager with the time and skill to lead their smaller group. But the odds are much lower that even one of the doctors or managers in the combined company has the chops to run a much larger practice. Before merger discussions get very far, a natural leader should be emerging. If not, take a pause and discuss this prominent gap as a group.

4. Followership: In addition to a willing and capable leader, a group of doctors exploring a merger project requires effective followers. What does this mean? Being supportive of the agreed leader and not tearing them down with petty criticisms. Being abundant with praise and lenient in reprimanding. If you have ever been in a leadership position, you know the phrase, “It’s lonely at the top.” This is especially the case over the course of a protracted practice merger effort to draw divergent, even nominally competitive, parties together.

5. Advance planning: Especially in settings where there is to be full operational and economic integration between constituent practices, the granular details and plans for execution have to written down and approved by both the doctor principals and the senior administrative staff of each practice. Which computer software platform will be used? What will be the new, combined staff benefits? Whose attorney is going to be kept on as general counsel? It is a long list.

6. Accretion: The best transactions, whether mild alliances or full economic integration, are reciprocally accretive to the earnings of all of the involved principals. Said more simply, in the best and easiest deals, every owner gets a nominal pay raise — sometimes immediately, more often in future years.

PAGE BREAK

7. Financial awareness: Both before and after a deal, the parties need to examine (and have their advisers examine) trusted financial and volume performance data from each constituent party and be able to a) forecast whether a given proposed transaction is likely to be accretive and b) ascertain if the forecast was indeed correct post-transaction.

8. Tempo: Time is not a friend of merger-consolidation efforts. Discussions that drag on generally collapse. You can help prevent this by setting deadlines for each of these eight major nominal stages of merger-consolidation:

  • Complete informal “what if” discussions.
  • Establish a formal exploratory task force, composed of representatives from each practice and whatever outside professional advisers they select.
  • Execute a nonbinding letter of intent spelling out generalized, prospective merger terms.
  • Exchange and review financial and volumetric data and forecast the expected benefits of merging.
  • Expand disclosure and due diligence activity (compliance, quality assurance, utilization, malpractice history).
  • Prepare and agree on a formal operations integration plan.
  • Prepare a longer-term business plan for the combined practice.
  • Draft and execute the definitive agreements (then the real work starts!).

Before and after the transaction

Keep these success factors in mind as you and your colleagues proceed together. Ask yourself as an individual as well as a member of one of the constituent groups, “Is there anything I can be doing to help this process?” Examples include:

  • Helping to choose and support the emerging leaders of any collaborative effort, whether they are on your side of the deal or the other side.
  • Encouraging your practice’s managers to provide data and participate in good faith in the early “what if” discussions.
  • Responding briskly to requests for input or data.
  • Attending any meetings that may be called.
  • Insisting on personally understanding any emerging financial analysis, which will not only be critical to making any merger work, but critical to your personal success post-transaction.

So much for the complex, stepwise success pathway going into a merger. What are the signs that your merged practices have actually become more successful by joining forces? The answers here are far less complex: Patients are better served. Staff are happier. The combined practice is stronger financially. You are growing and gaining market share at a faster pace. The doctors and managers, alike, are in greater control of your company’s future.