Cybercrime Considerations When Insuring A Tech M&A

The growth of the tech industry is driven by the expansion of the mobile platform. However, the rise of the mobile platform places the tech industry at a distant disadvantage in the fight against cybercrime. In 2017, cybercrime was a leading risk to businesses worldwide.[1]   Cybercrime cost U.S companies $21M with damages expected to reach $6 trillion by 2021.[2]

The nature of technology places the tech industry as a perpetual target for cybercrimes. Data breaches and the extent of damage they cause have a tremendous impact on a company’s bottom line. Cyber Security insurance provides a buffer which will protect the company from the cost of cyber-attacks. Insurers consider a company’s security score when determining to underwrite an M&A deal.

To determine a company’s security score, insurers will analyze the companies 1) construction of security program and crisis management, 2) Occupancy of data management and access management, 3) Protection of their operations and responses, and 4) exposure to security breaches.[3] Adequate cybersecurity measures can decrease a company’s risk exposure. Therefore, the acquisition of cyber insurance mitigates the risk associated with cybercrimes in the tech industry and help protect the deal value.


[1] https://www.statista.com/statistics/422203/leading-business-risks-usa/

[2] https://cybersecurityventures.com/hackerpocalypse-cybercrime-report-2016/

[3] https://www.fireeye.com/services/cyber-insurance-risk-assessment.html

Post-Transaction Employee Integration Considerations In Healthcare M&A

In Healthcare M&A many changes occur after the transaction as a consequence to the integration of the facilities. Changes are necessary to facilitate the integration of the companies and create long-term synergy.

One of the most necessary changes come with licensing and compliance. In a healthcare transaction, two or more entities join together and operate under the same licensing. There are a great many licensing and regulations in the healthcare space. The new entity must comply with all the laws and regulations as to when they were separate. To remain in compliance or become compliant they must make changes in their system to manage the new licensing requirements and maintain compliance.

The Health Insurance Portability and Accountability Act (HIPAA) mandates the protection and security of patient information.[1] Hefty fines are imposed on violators. The post-transaction phase of a healthcare transaction presents a high risk of exposure of patient information. Each entity involved in the transaction has their own systems and procedures to secure private information. These procedures and systems may not be equal or may not sync when put together and create a hole which private information may be leaked. The newly formed healthcare entity must make changes in its systems, processes, and training to maintain compliance and protect patient information.

Effective post-transaction integration plans are designed to create long-term value. To be effective, an integration plan should be developed early on in the process which focuses on creating positive synergies.


[1] https://www.hhs.gov/hipaa/for-professionals/privacy/laws-regulations/index.html

 

Employment Considerations In Healthcare M&A

The Workers Adjustment and Retraining Notification Act (WARN), provides that employers must give advance notice to its employees prior to any closing or mass layoffs.[1] An employer who violates this act is liable to each employee affected by the violation.[2] Penalties for violating the WARN Act include the average highest wages earned by the employee for the past 3 years, the payout of medical benefits, and civil penalties. With the exception of medical benefits, all of these penalties accrue each day of the violation period, with wage payouts to all the employees affected by the violation.[3]

The health care industry is massive but not untouched by layoffs and branch closings. Due Diligence must be done to expose any WARN triggering event prior to closing and if so, were all the WARN requirements filed promptly and accurately. As one of the biggest industries in the country, the healthcare industry employs a significant number of employees. Thus, Healthcare organizations can incur massive amounts of accumulated penalties which affect the bottom line and put the deal in jeopardy.

Another employment concern which requires due diligence is immigration and the immigration status of those employed in the healthcare industry. According to the U.S. Bureau of Labor Statistics foreign-born workers comprised 5.2% of the healthcare labor force.[4] That amount rises even higher when you include immigration employment in healthcare supportive roles such as hospital maintenance (8.4%) and Personal care (4.3%).[5]

Employment concerns include documented and undocumented immigrants. Immigrant doctors, nurses and other employees presumably require specific work Visas as a condition to their employment eligibility. Visa requirements need to be maintained to prevent the risk of penalties and loss of talent. Undocumented immigrants working in the healthcare sector are cause for concern and can be a violation of laws in and outside of immigration. Proper employment classification is necessary for a healthcare transaction because it directly affects tax liabilities. Presumptively undocumented workers are likely to be classified as independent contractors instead of employees even when they work long hours and for less pay. Employee misclassification can result in higher tax burdens or penalties, as well as, legal liabilities with respect to potential wage and hour laws. Therefore, healthcare M&A transactions involve extensive employment due diligence to prevent these unwanted penalties.


[1] 29 U.S. Code § 2102 – Notice required before plant closings and mass layoffs

[2] 29 U.S. Code § 2104(a)

[3] 29 U.S. Code § 2102(a)3

[4] https://www.bls.gov/opub/ted/2016/foreign-born-more-likely-than-native-born-to-work-in-service-occupations.htm

 

[5] https://www.bls.gov/opub/ted/2016/foreign-born-more-likely-than-native-born-to-work-in-service-occupations.htm

Valuation of Healthcare Companies In A M&A Transaction

The Healthcare space is heavily involved in M&A transactions. Valuation of these types of transactions is mainly focused on EBITDA (earnings before interests, taxes, depreciation, and amortization) multiples. EBITDA multiples are derived from dividing the Enterprise Value by EBITDA. The higher the multiple, the higher the Value. The Healthcare space consistently sees multiples of 13x EBITDA and up[1].

Two other main factors used to evaluate healthcare transactions are Risks and Growth. Plain and simple, low risk and high growth potential are desired when evaluating a healthcare transaction. The main risk associated with healthcare transaction is the level of reliance on federal reimbursements. Healthcare organizations which rely mostly on federal reimbursements are considered to be a high risk. Those that have a functional diversity of federal reimbursement and private payments are considered to be less risky.

Growth and the ability for future growth are highly desired when entering into an M&A transaction. Growth can occur either organically or through acquisitions. Healthcare organizations which have an established platform for growth are considered more valuable. Growth through acquisitions is the dominant growth strategy in the healthcare industry. Larger healthcare organizations are able to develop and hire talent to facilitate growth.


[1] Duff & Phelps, Healthcare Services Sector Update Dec. 2017

Pros vs Cons between Vertical vs Horizontal Acquisitions in a Healthcare M&A

M&A activity is the primary source for growth in the healthcare industry. The two types of acquisitions which facilitate growth are Horizontal Acquisitions when a hospital acquires another hospital and Vertical Acquisitions when a hospital acquires an ambulance company or other company which provides a service to the hospital.[1] Horizontal and Vertical Acquisitions are not mutually exclusive. Healthcare organizations routinely enter into both types of transaction to facilitate growth.

Horizontal acquisitions in the healthcare space involve the acquisition of another healthcare organization which is in the same market, i.e. Hospital acquires it’s competing hospital and a pharmaceutical company acquiring another pharmaceutical company. The main benefits of this form of acquisition are that it eliminates market competition and increases your market reach automatically.[2] The newly combined power and reach give the company a competitive edge over other competitors. However, a downside is that you also acquire the risk associated with the acquired healthcare organization which may decrease its value.

Vertical acquisitions in the healthcare space involve the acquisition of a healthcare organization in a different market. As a larger healthcare enterprise, the acquiring company has access to multiple markets to diversify its portfolio and increase revenue streams. Also, by joining entities across the healthcare market, this allows improvements in quality and cost efficiency of care, which in turn are bestowed upon the patients/customers. Quality of care and cost of care are the primary concern in the healthcare industry. Vertical acquisitions allow for the development of consolidated payment plans and streamlined treatment which benefits the customer.


[1] https://www.investopedia.com/ask/answers/051315/what-difference-between-horizontal-integration-and-vertical-integration.asp

[2] https://www.investopedia.com/ask/answers/051415/what-are-advantages-and-disadvantages-horizontal-integration.asp

Pros and Cons for a Vertical vs. Horizontal Acquisitions in a Tech M&A

M&A activity is the primary source for growth in the Technology Industry. The two types of acquisitions which facilitate growth are Horizontal Acquisitions when a tech company acquires another tech company and Vertical Acquisitions when a tech company acquires a manufacturing company or other company which provides a service to the tech company.[1] Horizontal and Vertical Acquisitions are not mutually exclusive. Tech organizations routinely enter into both types of transaction to facilitate growth.

Horizontal acquisitions in the tech space involve the acquisition of another tech organization which is in the same market, i.e. Tech company acquires it’s competing tech company, such as Facebook acquiring SnapChat and Instagram. The main benefits of this form of acquisition are that it eliminates market competition and increases your market reach automatically.[2] The newly combined power and reach give the company a competitive edge over other competitors. However, a downside is that you also acquire the risk associated with the acquired tech organization which may decrease its value.

Vertical acquisitions in the tech space involve the acquisition of a tech company in a different market. As a larger tech enterprise, the acquiring company has access to multiple markets to diversify its portfolio and increase revenue streams. Also, by joining entities across the tech market, this allows improvements in quality and cost efficiency of care, which in turn are bestowed upon the patients/customers. Quality of care and cost of care are the major concern in the tech industry. Vertical acquisitions allow for the development of consolidated payment plans and streamlined treatment which benefits the customer.


[1] https://www.investopedia.com/ask/answers/051315/what-difference-between-horizontal-integration-and-vertical-integration.asp

[2] https://www.investopedia.com/ask/answers/051415/what-are-advantages-and-disadvantages-horizontal-integration.asp

Prominent Regulation concerns for a Tech IPO/ICO

IPO Regulations

Initial Product Offerings (IPO), are regulated by the SEC. The Securities Act of 1933 requires companies to open their books to the public and registering the securities they wish to sell with the SEC. The Act has two main functions; to require that investors receive the financial information concerning the securities and to prohibit fraud in the sale of securities. [1]

The Securities Exchange Act of 1934 regulates the trading markets and requires compliance with ongoing SEC reporting obligations.

Public companies are also regulated by the Sarbanes-Oxley Act of 2002. The Oxley Act seeks to prevent corporate fraud. It created the Public Company Accounting Oversight Board.

ICO Regulations

Although it’s a digital market, specific facts may determine that the ICO is a security and fall under the SEC jurisdictions. To date, no ICO has been registered with the SEC as a security.[2] However, companies issuing ICO may be required to file a regulation D exception with the SEC. The regulation D exception which will allow them to sell the ICO without the need to register as a security with the SEC.[3] Companies who do not file a regulation D exception may be subject to fines and other punishments by the SEC.

The primary regulatory concern for ICOs in the lack of regulations. By the nature of blockchains, ICOs are designed to be market regulated with minimal third-party oversight. However, the SEC does give some oversight on dealing with ICO to prevent fraud and promote healthy investment opportunities. [4]


[1] https://www.sec.gov/fast-answers/answersregis33htm.html

[2] https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11

[3] https://www.sec.gov/fast-answers/answers-regdhtm.html

[4] https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11

Valuation Of A Tech Company In A M&A

M&A valuations are used in determining the purchase price of a target company. There are two fundamental principles in M&A valuations. The Buyer wants to purchase at the lowest value, and the Seller desires to receive the highest value. The traditional method of valuation is to analyze past performance. Start-up Tech companies are in a unique position in which they do not have a past performance to analyze. Nevertheless, tech M&A transactions are continuously placed at a high value. This is done by comparing the start-up with established tech companies which are similar in kind. [1]

In this market-based valuation method, investors look to the price of acquisitions in recent transactions of similar companies. Market Multiples allow investors to get an idea of what the market is paying for similar companies.[2] By analyzing similar companies, investors can forecast the future earnings of the startup. Also, investors can utilize these forecasts to make a backward projection to document potential growth.

Another Method of valuation of start-up tech companies is the Discounted Cash Flow (DCF) method. DCF estimates the value of a start-up tech company based on future cash flow. The present value of expected future cash flow is found by using a discounted rate. The startup is then valued at the present value estimate.[3] An acquiring tech company will consider buying the startup tech company if the present value estimated is equal to or higher than the cost determined by the market multiples and there is potential future growth.


[1] https://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

[2] https://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

[3] https://www.investopedia.com/terms/d/dcf.asp

Federal And State Governing Bodies Approvals For Healthcare M &A

Under the Under the Hart-Scott-Rodino Antitrust Improvements Act, the Department of Justice (DOJ) and Federal Trade Commission (FTC) have jurisdiction over M&A activity of a certain size which may affect commerce.[1] Transactions which may trigger an anticompetitive effect are reviewed by the (DOJ) and the (FTC) for approval. Healthcare M&A transactions regularly consist of multibillion-dollar deals and are formed with the purpose of consolidating the market and are regulated by the DOJ and FTC.

When reviewing a potential transaction, the DOJ analyzes the proposed deal to determine if the transaction would “substantially lessen competition”[2] if allowed to be executed. Two recent Healthcare M&A transactions which were subject to DOJ review were CVS Health Corporations desired purchase of Aetna Inc. and Cigna Corps take over Express Scripts Holding Company. Both cases were held to the “substantially lessen competition” and allowed to proceed. However, the CVS-Aetna deal was approved on the condition that Aetna’s Medicare prescription drug business be divested from the deal.

State Antitrust laws must also be considered when entering into a healthcare M&A transaction. States have their individual state-specific antitrust laws which may prevent a transaction from being completed. This holds true with the CVS-Aetna deal. Although the DOJ has approved, the States of California, Florida, Hawaii, Mississippi, and Washington have joined the U.S. DOJ Antitrust Division in a civil suit to prevent the transaction on the ground that it would eliminate competition.[3] The states’ ability to regulate and prevent the execution of healthcare transaction make it necessary to complete high-level reviews of all the states laws which may affect the deal.


[1] 15 USC 18, Acquisition by one corporation of stock of another

[2] 15 USC 18, Acquisition by one corporation of stock of another

[3] https://www.justice.gov/opa/press-release/file/1099831/download

Hospital Liabilities And Malpractice Suites In A Healthcare M&A

Part of the due diligence process in M&A is to conduct a legal and insurance due diligence. The legal due diligence will uncover the target’s history of malpractice lawsuits and current or potential future litigation. According to the National Practitioner Data Bank[1] medical malpractice payouts amounted to $3.9BN in 2017.[2] All states require healthcare facilities to carry adequate malpractice insurance. The standard amount of coverage varies by state and may be up to $3M per year. Insurance due diligence is designed to analyze the targets current insurance to verify adequate coverage. High litigation payout will increase the hospital’s insurance premiums, which may significantly devalue the target and put the deal in jeopardy.

Malpractice lawsuits can have a substantial effect on a hospital’s bottom line regardless of the outcome. The doctor-patient relationship is the cornerstone of the healthcare market. News of news negligence or other suites may make patients reluctant to seek medical help from that facility.[3] Malpractice may also drive the overall cost of healthcare up. Malpractice suits commonly result in million-dollar settlements. The cost of which is transferred on to the consumer. Liability insurance premiums can skyrocket after a lawsuit which may result in a doctor seeking new jurisdictions of which they can work. Also, defensive medicine will be a concern of doctors prescribing unneeded medical test to protect themselves from malpractice claims. [4] All of these factors are considerations made during the due diligence process in an M&A transaction.


[1] https://www.npdb.hrsa.gov

[2] https://www.capson.com/medical-malpractice-insurance-by-state

[3] https://online.tamucc.edu/articles/malpractice-and-its-effects-on-the-healthcare-industry.aspx

[4] https://online.tamucc.edu/articles/malpractice-and-its-effects-on-the-healthcare-industry.aspx