Winning Value in M&A

by | Aug 11, 2022 | Finance, Strategy

By Garett Robertson and Tadeus Dobrovolskij

Victory usually goes to the army who has better trained officers and men.

Sun Tzu

It has been said a lot already about the importance of corporate culture  and its effect on financial results. Nevertheless, it’s still often overlooked. In M&A this is especially true.  For unseasoned M&A teams, they may simply see what they will get from a deal.  They see access to a new market, increase in market share, inefficiencies they can cut and so on.  Seldom do they contemplate the implications of culture clash.

In reality a successful M&A is as much about what the acquiring company can give as what they can get.  What kinds of capabilities or market access will the acquiring company give to the acquired?  This is especially vital to understand in distressed acquisitions where the business lacks competitive strengths and may already have significant trust and leadership problems.  The goal for the acquirer is to understand what essential capabilities they can give to the acquired.

From our experience the keys to a successful acquisition involve not only identifying revenue and cost opportunities but also in understand how the cultures will mix and how both sides of the transaction will benefit each other and developing a detailed integration plan.

Below we share a case of how, Garett Robertson, led the acquisition and transformation of a distressed skilled nursing facility.  Its success and value to the organization rested not simply in what we identified that we could get from the deal, but in what we were able to give.

Several years ago I was involved in a turnaround project while leading a large skilled nursing provider.  A financing partner of mine had a tenant in one of their health care facilities that had become financially distressed and unable to manage it any longer.  The building’s recent survey history was riddled with citations, generally revealing the lack of leadership and coordination between the various teams in the building.  

When I received the phone call about this project, I remember feeling excitement and anxiety.  It was an opportunity to move into a new and desirable market with significant growth opportunity.  At the same time, I had been through turnaround acquisitions before and knew how difficult they could be.  This one was especially important to me because my friends had reached out directly seeking help trusting in my ability to succeed.

I knew that amidst the opportunities that the project offered, there would be strong cultural resistance to the necessary changes in this turnaround.  I suspected that their team consisted of managers acting independently of each other and in all likelihood even would compete against each other by blaming other departments for the survey citations. I also suspected that the team lacked clear direction and leadership so when problems arose, they were expected to come up with their own solutions independent of any help from anyone else.

We were a very different organization.  We developed our competitive strengths through building strong interdependence amongst our teams and developing specific programs that we expected everyone to be trained on and follow.  In many ways, we were the exact opposite culturally of this facility.  Our task then was to show them how our culture would be the solution that they needed to turn around their operation.

We formalized our contracts quickly, and shortly thereafter, I made my first visit to introduce myself to the senior leadership in the building.  My suspicions about the team were quickly confirmed.  The administrator was new and had only been there for a few months.  He was holding the role merely as an interim position while the company searched for a permanent administrator.  The Director of Nursing (DON) was fresh to the team as well.  Although highly competent and a former surveyor, she lacked the experience leading teams through the kinds of stressful turnarounds that this building needed.  I left knowing I would need to find replacements.

Despite a fresh remodel including greatly expanded therapy department and new electronic patient record system, the building had failed to gain any real momentum in the market.  It remained half full with a poor reputation in the area.  Insurance networks would not include it in their networks due to the survey history.  The administrative team was slow to respond to the referral sources in the market leaving them with only the most difficult to care for residents that nobody else would take.  While this resident population could have been an opportunity in and of itself, the team was not trained or prepared to handle this kind of caseload.  The team was left with low revenue, low occupancy, difficult residents and poor reputation that all were reflected in their survey outcomes.

When we began formulating our plans to turn the building around, we quickly noted the opportunity for us to enter a desirable market and increase the building’s revenue.  It was a simply stated, but difficult to implement solution: fix the surveys, stop admitting residents that were beyond the team’s ability to provide care, market the impressive therapy department, and get contracts with the insurance networks.  Additionally, the building had suffered from high turnover, which represented further opportunity to reduce unnecessary costs over time as the staffing situation stabilized.

We knew that the market opportunity and the ultimate ROI would not be achievable unless we could fix the underlying problems with the team.  Transforming the team became the focus of our efforts.  Through our due diligence we realized that we could overlay our clinical expertise to help the building through the turnaround.  We developed a plan that involved staff development, process implementation and systems upgrades.

The early goals were to get the different departments working together instead of remaining fragmented.  We hoped that by building trust within the teams and training them on clinical best practices we could get them functioning as a unit.  Initially, the plan was to convert their systems to ours while focusing on building trust and training the staff.  The next stage focused on survey readiness including implementation of proper quality assurance and performance improvement programs as well as mock health inspections.  Through both of these early stages, there was a focus on building trust with the local community through better outreach to resident referral sources and shifting the resident population.

We expected these stages to take most of the first year.  A building only gets surveyed once a year and the wide scale changes that needed to happen would take time to develop.  The first survey happened as expected.  It was a marked improvement over previous surveys, but it still was not as good as we needed it being slightly worse than the state average.  Additionally, it was during this time that we changed the administrator and DON in favor of an internal candidates whom we believed we could train to carry the building.  

While implementing new systems and processes were crucial in the turnaround, this choice of staff for these two roles was the most critical to the transformation.  We could have recruited an industry veteran to the role from outside the company.  Knowing the difficulties of these kinds of stressful turnarounds however, we felt it would be best to find people with local knowledge of not only the market, but also our company whom we could train into the positions.  Industry veterans may know how to run the home well, but they would seek to follow their own processes and habits.  For this case, we needed very specific interventions that we could control.  We appointed our best leaders to act as interim administrator and DON to begin training our permanent choices into the roles.

Though our methods to this point may not have been the only way to handle this turnaround, the residents were quite pleased with the changes we were making and our efforts were paying off with strong relations in the local community.  A quick survey of the residents revealed smiling faces and general contentedness with our progress.  The resident council meetings were open and honest providing valuable feedback to the staff.  Still, we knew the building still had a long way to go.  It needed to not just become good and leave its problems in the past, but it had to be significantly better than the competition to justify getting the coveted insurance contracts we needed.  We were quick to congratulate the team and focus on improving for the next round.

Over the next year, the team had time to continue to refine their processes and get used to working with each other.  As the team came together during this time, the building saw a nearly 30% increase in occupancy with most of these gains coming from an improved payer mix significantly improving revenues.  When the next survey came, the team passed it expertly with only a few minor citations.  They had transformed over this year to one of the best providers in the area and they earned admittance into the coveted insurance networks.

The total transformation of this building took just over two years with marked progress along the way.  For us it was an opportunity into a new market with strong ROI as the building was corrected.  For the building it meant complete culture change. The building moved from losing $40k/month to making about $25k/month through this transformation.  

Although it is always easy to evaluate in hindsight, this project took significant planning and proper execution.  We did not simply fall into success.  We knew that if we approached this project trying to capitalize on what we could get, we would have taken an already stressed team and only made the situation worse.  This case is a prime example of how we brought value to them through what we could give.

The business model itself wasn’t changed, and no synergies were tapped – it was a success of a different type. To understand it, we should take a look at the framework that we outlined already in the previous article, specifically at the parts which make a company: inputs, throughputs and outputs.

The inputs are actually the key in our example. The health care facility in question was drifting aimlessly as an army without a general. The path to success started with an introduction of a new strategy (1), which we can define here as “increase revenues by providing better service and gaining access to more lucrative insurance contracts”. Afterwards, the management of the facility was changed to be in alignment with our culture and the necessary values (2), alongside with an improvement of both skills and team work of people (3).

Processes (4) aimed at quality improvement and KPIs introduced to monitor performance were a part of throughput. All changes together, in turn, led to a change of culture (5). Over the span of two years, the health care facility was improved, new processes and methodologies became a part of its DNA, and we can see it as a boost to company’s capabilities (6).

The results were in outputs. Outputs, in form of revenues, changed drastically. Unprofitable venture became profitable. Potentially, stricter quality control could minimize waste and reduce costs as well, which could lead to even higher profitability.

Although in this example we are discussing health care industry, similar results could have been achieved in other industries as well. Maybe service quality wouldn’t be the key point of a strategy in manufacturing. However, changes to inputs and throughputs would be directly linked to manufacturing efficiency (waste) and the amount of defects a company produced, thus leading to the same possibility of improvement.

In retrospect as we have contemplated this transformation, we have come to realize that this transformation was successful for three reasons:

  1. we set realistic expectations for the turnaround timeline
  2. we knew value would come through culture change, and
  3. despite other synergies and cash flow opportunities, this project’s ROI would rely more on what we could give than what we would take.

Just like in the quote of famous Chinese strategist, we believe that the human component shouldn’t be neglected. Empower people, build better teams and, with a clear strategy, success will follow.

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