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To merge, or not to merge

April 2, 2014
by Shannon Brys, Associate Editor
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Mergers, acquisitions, affiliations and joint operating agreements in the behavioral healthcare field are among the words heard at conferences and splashed throughout in headlines throughout the country. Mark Monson, president and CEO of Fairbanks, says that anywhere between 60 and 80 percent of mergers and acquisitions fail to meet objectives and financial expectations.

The main reason, he says, is because organizations lack a complete process of assessment. The due diligence process, which is a thorough search and analysis of a potential investment, involves questions that pertain to finance, a cultural assessment, and a fair market assessment if the organization being acquired is a non-profit. The cultural aspect is often the missing piece of the puzzle for the unsuccessful mergers/acquisitions in the field.

Another piece that’s often missing is serious time and consideration, says Monson, who has more than 30 years of experience as a healthcare administrator and clinician. When deciding to begin the process of a merger, acquisition, or joint operating agreement, it’s crucial to spend time nailing down the strategic intent – What are the organization’s expectations? What does it want to get out of this agreement?

Monson, who will be speaking on this topic at the 2014 Behavioral Healthcare Leadership Summit in St. Louis, Mo., in August, says many times issues arise when organizations move into a merger or acquisition before the purpose is realized. “Often someone might say, ‘Well, everyone else is merging. Maybe we should merge.’ The intent and expectations not being defined can really cause a lot of problems in the future,” he explains.

Choosing the right model

In order to decide whether to choose a merger, acquisition, a joint operating agreement, or a joint venture, it would be in the organization’s best interest to understand the difference among the options.

A joint operating agreement is a moderate-level affiliation strategy. This type of agreement typically involves several organizations, each of which retains its own board of directors. In this case, there may be a strategic intent to operate in unison with one another but to retain ownership and perhaps control.

In a merger, typically one organization assumes another. Ownership of one of the organizations is given up. The original organization basically dissolves and is merged into the other.

An acquisition is extremely similar to a merger situation. In this case, one organization purchases another and the purchased organization is folded into the purchasing organization.

In a joint venture, two organizations come together to jointly operate a product line or business. Typically, one organization has a controlling interest, 51 percent, while the other has a 49 percent ownership. Although not always the case, it is common. The situation could also play out in a scenario in which the two organizations want to come together to operate a business. One organization takes on the leadership/management role and the other serves as more of an equity holder. In these situations, the organizations are typically governed by a joint management board.

First-hand experience

Prior to his role at Fairbanks, Monson served as the chief executive officer at a community mental health center (CMHC) in Vermont that developed an affiliation agreement/joint operating agreement with a regional hospital. The two organizations had a history of working together and the staff from both the hospital and the CMHC communicated constantly, so there was no formal cultural assessment. As representatives and management from both parties gathered together, decisions were made about the strategic intent and other goals of the agreement. The organizations wanted to remain autonomous in that they would have separate boards but would share strategic planning as well as joint purchasing and capitation.

The entire process took between nine months and a year to complete. Much time was spent on the financial due diligence for both organizations – taking a look at audits, credit worthiness, etc. Additionally, the CMHC worked with its legal staff for analysis, assessed the management capabilities of the hospital and the culture of the organization to make sure it was a good fit, and decided whether the hospital was truly an entity that the CMHC wanted to partner with. In the end, the answer was “yes.”

After the affiliation was complete, Monson continued as CEO at the CMHC, but also became a vice president at the hospital where he assumed operational duties. He became CEO of Fairbanks in October 2012.

His presentation in August will address:

  • how organizations can prepare for partnerships,
  • how to decide which partnership model is right strategy,
  • how to avoid common pitfalls in these situations,
  • how to identify suitable partners, and,
  • the due diligence process required for a successful partnership.

“You want to do these things for the right reasons for your organization and for your market,” Monson explains. “All markets are different, there’s no singular answer that’s right for everyone.”