Challenges In Making Mergers & Acquisitions Work•Lack of knowledge about merger strategy, process & integration plans •Failure to find the right partner •Lack of time and funding

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#OMInnovation

The 2018 OPEN MINDS Strategy & Innovation Institute

June 6, 2018 | 2:00 pm – 3:15 pm

Ken Carr, Senior Associate, OPEN MINDS

Challenges In Making Mergers & Acquisitions Work


I. Challenges & Best Practices Of The Merger & Acquisition

Process

II. Merger & Acquisition Case Studies:

• Danita Johnson Hughes, Ph.D., President & CEO, Edgewater Health

• Nicholas C. Riehl, J.D., MBA, VP of Corporate Development & General

Counsel, ncgCARE

• David Guth, Chief Executive Officer, Centerstone

III. Questions & Discussion

Agenda

Challenges & Best Practices Of The Merger & Acquisition Process


Mergers & Acquisitions Are A Growing Strategy

Mergers and acquisitions are a growing strategy in health care to create “scale” –resulting in greater market impact and profitability

The volume of deals is growing

– 115 hospital and health system deals announced in 2017 – a 13% increase over 2016

– Aggregated deal volume over $63 in health systems deals in 2017

The competitive market is changing – larger and stronger organizations

– 16 of the deals in 2017 involved organizations with over $500 million

– The average margin of acquiring organizations in the behavioral health market was 12.8%

Investors see the “value” in behavioral health services

– 62% of behavioral health merger and acquisition activity was with private equity

– Addiction treatment is considered a “fragmented market” with $42 billion in revenue by 2020


Why Pursue M&A As A Strategy?

Economies of

Scale/Reduced

Costs Per Unit

Expansion of

Services

Expansion of

Geographic Reach

Opportunity to

Rebrand

Enhanced

Collaboration /

Population Health

Opportunities

Increased Internal

Talent

Increased

Opportunities for

Innovation

Better

Infrastructure &

Technology

Enhanced

Opportunities for

Payer Contracting

& VBR


Risks Of The Merger & Acquisition Process

Merger Risks

• Negotiations ultimately fail

• Merged organizations never

achieve integration due to

incompatibilities

• Cost savings (“merger synergies”)

never materialize

• Leadership tensions impact

operations and outcomes

• Community constituents have a

negative reaction

Reasons Why Mergers Fail

• Lack of knowledge about merger

strategy, process & integration

plans

• Failure to find the right partner

• Lack of time and funding allocated

for due diligence and post-merger

integration activities

• Viewing mergers as solutions to

financial or leadership issues

instead of growth and positioning

strategy


Challenges – Post Merger – Bigger & More Complex

Missing Needed Talent

Cultures Not Aligned

Adjusting To Larger Scale

Issues Missed In Due Diligence

Synergies Not Achieved


The OPEN MINDS 10 Guiding Principles To Successful Mergers

• Start with a plan to create strategic advantage and don’t

waste resources due to lack of purpose and focus.

1. Planning comes first

•Lay out the process and decision criteria in advance so you

aren’t distracted as issues arise.

2. Be systematic and have a process

• Most organizations need additional knowledge and

expertise to make sound decisions – market intelligence,

legal, finance, political ramification

3. Use experienced talent

•Have a planned, deliberate (not necessarily slow) process

for finding potential partners

4. Be deliberate in partner selection

• Make sure goals of all partners line up early in the process

5. Be sure the priorities to all parties

•Due diligence involves investigation and assessment and

requires complete openness by all partners.

6. Expect to give and get full disclosure

•Strategic plans need to be flexible as realities change – be

willing to do things differently and better

7. Allow decision making to evolve

•Having multiple partner choices enhances to the quality of

the final partner selection decision

8. Build in time for a competitive process

•Ensure that there is an implementation plan that

includes tactics, assigned responsibilities, and a budget

9. Design an implementation plan

•Develop a communication plan to address questions and

concerns from consumers, customers, referral sources,

payers, regulators

10. Prepare for stakeholder questions

Edgewater Health

Danita Johnson Hughes, Ph.D., President & CEO,

Edgewater Health

Our Journey to Success

Who we are:

44 years in business

Comprehensive behavioral health services provider

Budget: $15M

Employees: 150

8 locations

Strategic Considerations

Viability

Business Growth and

Development

Mission Fidelity

Patient Population Health

Community Health and

Wellbeing

WHERE DO WE GO FROM HERE?

MERGE, BUILD OR BUY

DECISION:Buy Internal Medicine Practice

25 years in business

For-profit practice

14 Employees

Budget: $2M

Two Locations

• Gary, IN

• Griffith, IN

WHOLE PERSON HEALTH

Primary Care ServicesGary and Griffith Offices

Our services include the following:

Routine Adult Well Care

Internal Medicine

Women’s Health

Sick Visits

Physical Exams

Disease Screening

Chronic Disease Management

Patient Education

ab Screening

Cardiac Evaluation

Diabetes Screening and Management

Challenges

Cultural issues Three different EMRs Different business

processes Billing different codes Workforce and

training issues Credentialing Malpractice insurance

Lessons Learned: Operations

Biggest challenge: IT

Primary care coding and billing

Communication between service

Primary care clinical quality measures

Physician Pay: Use of RVUs

Silos not easy to overcome

Opportunities Provided

Creation of a health home

Continued organization growth

Improved quality of care

Better coordination of care

Marketing Award

Our Future Additional acquisitions opportunities

FQHC designation positioning

Additional expertise

OBGYN

Pediatrics

Dental

Certified Behavioral Center

positioning

Stabilizing finances

New comprehensive EMR

Road To Success

SUCCESSNext Exit

Questions? More Information?

Edgewater Health

Danita Johnson Hughes, PhD

President/CEO

1100 W. 6th Avenue

Gary, IN 46402

219 885-4264

edgewaterhealth.org

ncgCARE

Nicholas C. Riehl, J.D., MBA, VP of Corporate

Development and General Counsel, ncgCARE

Mergers & Acquisitions-Our Experience

Nick Riehl, VP Corp Development

About Me In 30 seconds

• First job post grad-school was as CFO/COO of $5mm mental health provider in PA

• Taught a class on M&A

• Company targeted by ncgCARE for acquisition 2 years ago

• I went to ncgCARE, ncgCARE runs my former company under management agreement

• Now I oversee M&A activities at the company

About ncgCARE

• For-profit, multi state provider

• Mission, values driven

• 3 years of acquisitions experience

• Fast growth, strong team

• Currently about $90mm in revenue

• 1900 employees

ncgCARE History

• Founded 1993 as Northern Virginia Counseling Group – group counseling practice

• Early programming focused on self-pay individuals

• Focus on dual diagnosis treatment

About Us

• Visionary owner

• Saw community-based care as the future of behavioral health, began opening offices across the state

• Changed name to National Counseling Group with an eye towards bigger things in 2005

• Our CCO is employee #2. Our COO is employee #5

• Prior to acquisitions, created Embrace (Treatment Foster Care) and Envision Counseling (Private pay)

So How Did We Become An Acquirer?

• Grew to almost $50mm by 2014

• Took a major rate cut in a primary program

• Decided being solely dependent on the Commonwealth of Virginia was a risky proposition

• With diversification in mind, we engaged an investment banking firm to craft our strategy

Our Acquisition Strategy

• Engaged investment bank to find firms:

– Between $5-$20mm in revenue

– Eastern seaboard only at first

– High quality providers, preferably utilizing mainly evidence based practices

– MH, Substance Abuse, Intellectual disability

– Outpatient, community based, low intensity residential services

– For profit preferred…but non-profits are welcome too!

Our M&A Experience

• 5 deals closed

• Several LOIs outstanding

• Interviewing new potential partners each month.

• Acquisition capital: • Series A- Bank funded.

• Series B- Mezzanine capital, line of credit

Compound annual growth rate

=26%

Our Expectations

▪Upside benefits…▪Quality

▪Access (people, risk, contracts)

▪Diversification (geography & services)

▪ Technology / Data

Turning Point Family Care

• Raleigh, NC MH Provider

• $6,000,000 Revenue in two locations

• 100 employees

• OP, Intensive In-Home, Peer, Day TX

Independent Adult Day Services

• Day Support for individuals with Intellectual Disabilities in Richmond, VA

• $300,000 revenue

• 7 employees

Appalachian Community Services

• Comprehensive provider of behavioral health services located in far-western North Carolina

• 200+ employees

• $14,000,000 revenue

• Services include OP, Intensive In-Home, Facility and Mobile Crisis, Intellectual Disability Group Home and Community Services

Starlight Behavioral Health

• Intellectual Disability Provider in Huntington, WV

• 180 employees

• $6,000,000 revenue

• Services include individual support, behavior intensive group home, forensic group home, behavior support, and service coordination

Grace Harbour

• Behavioral health provider headquartered in Peachtree City, GA, with offices around northern half of state

• 55 employees

• $4,000,000 revenue

• Services include OP, MST, FFT

Challenges

Challenges

• We didn’t expect it to be easy…

• Stresses at all levels of the organization

• Because BH is so different state to state, its like running 7 separate companies

Challenges – The Organization

– What is the right organizational structure to maximize chance of success?

– Are the right people in place?

– Are there right people on wrong seat on the bus?

– There were changes, but so far there has been a role for everyone

– Need people who are excited for change and want to learn new things every day

Challenges - People

– People assume they’re getting laid off (or getting a raise)…it takes time to develop trust

– For mission driven companies, it takes time to convince them that you’re mission driven too

– How to use owners who want to remain involved

– How much face-to-face attention is needed?

Challenges - Technology

• Biggest challenge has been internet connection –it takes consistent service for videoconferencing

• HRIS systems are difficult (pay frequencies, practices, etc.)

• Accounting, expense management tends to be the easiest

Challenges - Technology

• eHRS

– Everything would be perfect if we were on the same eHR…

– It takes a lot of time and resources to change systems

– There is no way to do it on day 1, so your integration planning is really an intermediate plan

Solutions

Solutions?

• Consistent communication (video messages)

• Using the org structure to communicate

• CareCon

• Domo - dashboarding

Have We Succeeded?

• Mostly yes…

• Back to our expectations

▪Quality

▪Access

▪Diversification

▪ Technology / Data

Centerstone

David C. Guth, Jr., Chief Executive Officer,

Centerstone

OPEN MINDSJUNE 6th, 2018

CENTERSTONE BRAND PROMISES

Brand Promises

Access – Individuals access treatment quickly and easily.

Personalized Care – Treatment is tailored to individual needs, goals

and life.

Treat to Target – The success of treatment is measured according to

the individual goals that clients set with their treatment team.

Innovation and Value – Individuals and payers know Centerstone for

cutting edge and high value clinical care.

Delivering care that changes people’s lives

48

49

CENTERSTONE AT A GLANCE

(Inclusive of the Uspiritus merger slated to take effect 7/1/18)

• Noble Purpose: Delivering care that changes peoples lives

• A not-for-profit healthcare system with annual revenues of $380 million

• 200 facilities in a basic five state footprint (IN, IL, KY, TN, FL)

• 22 service lines spanning mental health, substance use, intellectual and developmental disabilities, and

integrated primary care

• 5,200 staff serving 180,000 people each year

• Result of the affiliation and or merger of 20 formerly independent non-for-profit organizations

BECOMING THE IDEAL COMPETITOR

What does that look like and Why:

In scale?

In service lines?

In capabilities?

In value to consumers, referral sources, payers, staff?

50

51

Market Level Opportunities: The emerging payer,

partnership, and policy marketplace, coupled with the emerging

evidenced base models, technologies, pathways, and practices of

care.

Opportunity Ceiling: The limits of opportunity

regardless of capabilities created by visibility, reputation,

trust, and leverage as perceived by external stakeholders.

Capabilities: Demonstrated competencies

52

THE FIVE WHYS

• Why Scale?

• Why Merger?

• Why Us?

• Why Them?

• Why Us? (again!)

ACME, INC. GROWTH PLAN

Now One Year Three Years Five Years

$WW $XX $YY $ZZ

Growth Tactic 1 year Certainty 3 year Certainty 5 year Certainty

Organic Growth

same store

new market or service

Acquire

non profit

for profit

Acquired

non-profit

for profit

Affiliation with

smaller scale

similar scale (+/- 40%)

larger scale

Joint Venture

non-profit

for –profit

54

THE PROCESS

• Dating - NDA

• Going Steady - Letter of Interest

• Engaged - Letter of Intent

• Marriage - Closing

• The Real Work

55

Elevates Opportunity

Ceiling

Expands Capabilities

Strengthens Capabilities

Interested

Affiliation Targets

MUTUAL ATTRACTION

Interested Interesting

56

57

MAKING IT WORK

• Culture

• Humility

• End versus How

• Accountability

• Grieving

Questions & Discussion

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Challenges In Making Mergers & Acquisitions Work•Lack of knowledge about merger strategy, process & integration plans •Failure to find the right partner •Lack of time and funding

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