Private equity sponsors struggle to make sense of the new ...

WatercoolerBELTWAY MONITORHealthcare Reform’s ImpactDealmakers aren’t necessarily sure that thenew legislation will benefit the M&A communityClarity is supposed to spark deal activity. Yet when PresidentBarack Obama’s $940 billion Healthcare Reform Bill waspassed into law in March, deal pros seemed even more uncertainabout the impact the bill would have on M&A activity.In an unscientific poll on Mergers & Acquisitions’ website,TheMiddleMarket.com, 54% of the respondents actually consideredthe bill “bad for dealmaking,” against 36%, which consideredthe legislation “good for M&A.” The balance thought itwould have no impact.The consensus among marketwatchers is that the legislationcould hurt the insurance companies (now on the hook for pre-existingconditions) and medical device manufacturers (the victimof an excise tax), while pharmaceutical companies, hospitals andprimary care providers should all benefit as the population of insuredconsumers swells.For the broader economy, reform appears mixed. Large corporationssuch as AT&T, Verizon, Caterpillar and others projectedhigher costs as a result of the legislation. AT&T, for instance,indicated that it anticipates seeing its healthcare costs climb by$1 billion. The phone giant pointed to a tax benefit it had beenreceiving that allowed it to help pay for retiree healthcare costs,which, as part of the new plan, is not deductible.Other components of the bill that will more directly impactM&A continue to emerge. Tighter guidelines, for instance, will beput in place, to make it easier to identify nursing home ownership.Tax benefits were also extended to small companies, with under 25employees, which one might thinkcould squelch motivation to add numbers.Still, even as the details continueto get ironed out, investors and acquirerswill surely identify which areasin healthcare stand to benefit, andmove quickly to gain exposure.Cerberus Capital Management, for instance, just days afterhealthcare reform was signed into law, struck an $830 million dealwith the Boston Archdiocese’s Caritas Health Care System. Thefirm will convert the non-profit owner of six hospitals into a taxableentity, renamed Steward Healthcare Systems. Hospitals, which havebeen among the most strained by the high cost of healthcare, shouldsee a change of fortune as the number of insured patients grows.Even those areas set to be pinched by the reform bill couldsee more M&A. Some deal pros, for instance, anticipate midsizedinsurers will be motivated to quickly either build scale orfind a larger company to help absorb the coming changes.CJ Bolster, a vice president at consultancy Hay Group, notesthat changes, good or bad, introduced by new laws, generally createsopportunities for buyers. “Every time there has been a legislativechange, there has been new entries into the marketplace,” hesays, adding that he anticipates home care and hospices will become“more integrated with local [hospital] systems.”Jeff McCormack, a senior analyst at Manning Napier’s lifesciences fund, believes the legislation could create holes that needto be filled by private investors. “Any industry that is losing moneyis ripe,” he says. McCormack adds that opportunity in varioussegments will be found on a region-to-region basis. —JonathanMarinoSEC Considers Full DisclosureCompanies and executives may no longer beable to hide behind a settlementAsettlement with the Securities and Exchange Commissionmay no longer be the first option for those trying tosave face. According to a story in the Washington Post inApril, the SEC is considering a new policy that will allow theagency to publish the details of its investigations into corporatemalfeasance, even when those charged choose to settle.As it currently stands, executives that settle with the SEC maypay a fine, but are typically freed from having to admit wrongdoing.The SEC’s enforcement director, Robert Khuzami, however,was quoted by the Post as saying that the agency will be reconsideringthe practice and may look to publish “a more fulsome record”of its investigations.The article, in identifying the driver of the potential change,pointed to the uproar created when the SEC allowed Bank ofAmerica to settle charges over bonuses paid to Merrill Lynch employeesahead of the government bailout.Other cases too, however, would seem to demonstrate the benefitsof transparency. Tech investor and Dallas Mavericks ownerMark Cuban sued the SEC arguing that the regulator was biasedin its effort to charge him for insider trading.10 MERGERS & ACQUISITIONS May 2010