Two become one

 

Partnerships, mergers, takeovers... whatever term you use, companies joining together is an increasingly prevalent feature of the healthcare industry. Brad Abbey offers a survival guide for sales and marketing professionals who find the company they are working for is, quite literally, no longer the company they joined.

In 1066, the French formed a partnership with Britain – by acquisition. They invaded the country. The final part of the negotiations failed at the Battle of Hastings. While the British may not have learned to cook as a result of this partnership, one thing they did learn was the art of fending off acquisitions of the country. Though whether the UK joining the EU was a merger or a takeover is still being debated almost 40 years later.

As I write this article, we are living through one of the most dramatic inversions of the UK economy that has ever been recorded. I have lived through several recessions, but this one is the most vivid and widely reported. It is probably a result of the recession’s global nature and the revolution in electronic news reporting that so much has been said and read about it. Mergers, partnerships and acquisitions have become a feature of the globalisation of the economy, and healthcare companies need to be aware of this and ready to deal with it.

Come together

The early part of this decade was marked by ‘easy money’: banks were keen to lend money and interest rates were low. That did not mean that companies were not keen to maximise their profits – but strategies could also be employed that involved using OPM (other peoples’ money).

Commercial partnerships fall into three distinct groups (though the distinction is sometimes blurred):
• Mergers are seemingly agreed arrangements whereby companies combine all the aspects of their operation with a view to making more money (or losing less). A merger may be the option of last resort for an organisation that has assets but is no longer financially viable. The assets may be physical properties (i.e. inventory), intellectual property rights, technology and manufacturing capabilities, market presence and reputation, brands and so on – whatever is wanted by a third party for its intrinsic value.
• Acquisitions are unilateral in nature – the acquiring company is getting something it wants to improve its business.
• Partnerships are arrangements where two organisations exist separately, but there is a synergy between what they do, and when they work together the result is of value to both. A classic example of this is drug delivery devices such as nebulisers. For the device company, forming a partnership with the drug company can bring advantages such as mutual recommendations and exclusivities.

The drug regulatory authorities are increasingly enamoured of the idea that if a delivery device is needed for a medication, a firm evidence-based commitment should be offered at the point of registration. From a device company’s point of view, this is a no-brainer of a partnership: someone else may be doing all the work in selling the medicine, and the device has to be acquired as a consequence. There are no losers.

Opening doors

Medical devices lend themselves to therapy area classification: wound care products, telemonitoring devices, radiology devices and so on. This is arguably a business development manager’s dream: it removes the barriers to contemplating the next step in deciding where an organisation should go.

For example, the German company Lohmann and Rauscher specialises in pain-reducing treatments for disorders of the venous and lymphatic systems, including compression therapy hosiery and bandages. The owner-managed company Activa has been one of the fastest-growing wound care and compression therapy companies in the UK. The takeover of Activa by Lohmann and Rauscher gave L&R its first foothold in the UK market (after a century of operation in continental Europe), plus access to the portfolio of Activa products on sale in the UK.

This all happened in December 2008, and the unwritten agenda seemed to be that when the partnership was formed, there was no underlying requirement to spend two lots of money – i.e. both to buy the company and to invest in its infrastructure. Clearly, when the banks start lending again, this new partnership (and others like it) will be raising capital to derive benefit from its enhanced position in the marketplace.

Corporate websites always present the best aspects of the deal. As fair usage, I quote what Activa says: “There are important synergies between the companies, which give rise to this truly symbiotic relationship:
1. both focus on the highest quality research and development
2. both work with clinicians and patients to provide the best possible products
3. both focus on comprehensive training and education for clinicians
4. both are strategically focused on treating and preventing venous and lymphatic disease with compression
5. both are strategically focused on wound care, reducing wound pain and increasing quality of life for patients
6. both focus on staff retention and training”

Such an account presents an appealing narrative for outsiders and insiders alike, but only time will tell whether events will go according to plan.

Just months after it was bought by investment groups Nordic Capital and Avista Capital in October 2008, wound and ostomy care product company ConvaTec (formerly a division of Bristol-Myers Squibb) acquired single-use medical device company Unomedical, a Copenhagenbased firm also owned by Nordic Capital. ConvaTec will have four business divisions: ostomy care, wound therapeutics, continence & critical care, and infusion devices. Its infusion devices business will continue to operate separately.

As required by the European Competition Commission, the integration will not include the Unomedical wound care division; the company says this will have to be divested. This is in contrast to the previous example, where the partnership continued to run as before. Despite the stated corporate philosophy, some might argue that there will be a period of risk for some or all of those involved in the divested division.

I have yet to meet someone who has been through a merger (on either side) and said: “Those guys think and work in the same way as us. Their pay is the same, and they have the same company cars.”

Side by side

Whatever name you give to it, there is little doubt that consolidation is the name of the game in the medical devices industry. This may be accelerated at the moment, as the economics of small companies investing in developing products starts to make less sense to the banks, which are retreating to what they know best: persecuting small customers. The bigger organisations have greater clout when it comes to establishing cost of goods and contracts with third parties. Today, no-one pays list price for anything anywhere. The ability to manage margins becomes doubly important: for arguing over what you pay your suppliers, and for adapting to the demands of your customers.

While it might be argued that each independent company you acquire is a competitor out of the market, the more realistic endpoint is that the bigger merged companies will compete with each other – and may be better poised to enter into creative contracts to secure sales and supplies. As long ago as 2006, business analysts Frost and Sullivan stated that the patient monitoring sector was experiencing a wave of collaborations and partnerships with vendors from the same industry, as well as from IT, telecommunications/ telemetry and other sectors. This may be a sign of companies not traditionally involved in medical technology and healthcare deciding that they have the expertise to make things better, and the quickest route is a strategic acquisition. Some have succeeded, but it has proved a road to hell for others.

Companies thinking about entering the medical devices market need to think about their core competencies. This is also true for companies courting a partner. Eastman Kodak, for example, has attempted this. The company has an obvious position in the digital imaging market. It tried to enter the radiology business – but due to the extremely rapid technological developments, it was unable to profit on its core competencies, and started looking for alliances or divestment of its healthcare group.

This is reminiscent of Kodak’s earlier foray into the pharmaceutical industry. In 1988, Kodak acquired Sterling Drug and proposed that as photosensitive chemicals were often pharmacologically active, it already had a core competence in the assembly of candidate molecules for development and marketing. Suffice it to say that the episode ended in tears for most of those involved; the only real beneficiary was Bayer, who managed to reacquire their classic crossed letter trademark in the USA.

When the deal goes down

Despite the emollient words in press releases, an overview of the various company partnerships that have formed in the past couple of years leads the onlooker to the conclusion that most of these deals are takeovers, one way or another. Put simply, one of the companies pays out and therefore calls the tune.

It is obviously tempting to view these events in a positive light – why not? The winners may be the customers, who are able to benefit from cost reductions. However, this is not always the case. A change in ownership of a product may be just the opportunity needed for the new owner to propose that the price be increased to bring the product back to profitability. In a big company there may be a critical size for market entry, and smallvolume products may find themselves voted out as being no longer economically viable.

While this might make good business sense, there may be unsatisfied end users who feel that their choice has been forcibly limited in the name of corporate logic. Enhanced customer service will only occur when it makes sense to the accountants.

If you are involved in the creation of a partnership, merger or acquisition, it’s important to keep certain issues on the agenda – whichever side of the deal you are on. From a sales and marketing perspective, the things to look out for are to do with the corporate brand, communications and products or services. For example: What properties is the acquiring company actually acquiring? How will intellectual property rights be handled? How will publicity and confidentiality be managed? And, of course, you will need to ask: What are the implications for current employees?

There is always a human cost when two organisations become one. Talk of ‘synergy’ and ‘partnership’ may sometimes misrepresent a relationship in which one partner is dominant.

Where is the love?

It is impossible to write an article like this without discussing the human aspects of partnerships, mergers and takeovers. The human element features both in the personal issues and in the corporate issues. It is quite common to read in press releases about the similarity of ‘cultures’ between merging companies. But I have yet to meet someone who has been through a merger (on either side) and said: “Those guys think and work in the same way as us. Their pay is the same, and they have the same company cars.”

Why companies join together 1. Big companies want to get bigger and buy a smaller company or part of a company with a key product, but continue to trade with the smaller company still operating in its own name. 2. Owners of a private company want to cash in on their investment (when the going is good). 3. Similar scenario when the going is bad, or even in receivership. 4. Acquiring patented technology that may be a good fit with existing products – if a company lacks the know-how for a desirable product, the simplest answer may be to buy a company that has it. 5. Distribution chains can be shared, and the logistics of global distribution work better for bigger companies. 6. Entry into a market – the easiest way for a US or Japanese company to get a foothold in Europe is to buy an existing company in the desired location. 7. Desire to change business model: often after a partnership, there is a strategic offloading of assets that do not fit the future model. 8. A private equity company believes that using its own business model after an acquisition will grow a business because of the superior operating environment. 9. Assembling a greater expertise to deal with the increasingly complex medical device regulations and supply chain problems.

A key question – which may end up being an issue at the individual employee level – is whether companies in the medical devices and technologies sector can truly unite and share their resources. Will there be, or can there ever be, ‘synergy’ in a fused operation? Without wanting to pour scorn on all the upbeat press releases, I offer words of caution that are based on a wider view of healthcare. It is rare to see a partnership that is equal. The more honest companies don’t even talk about a balance of interests, they just say: “It’s an acquisition, we’re in charge.” The management and employees of the target organisation typically go into siege defence mode or vote with their feet.

 One of the commonest problems of mergers is the loss of talent when key employees don’t hang around to find out the shape of the new organisation. Often it is the young rising stars who leave, as they are attractive to other employers (the headhunters will be watching to see who they can pick off). The new company may seek to identify individuals who are hanging on for redundancy or early retirement; and despite what is said up front about headcount, companies will immediately seek to identify areas of duplication. Organisations don’t merge to spend money: they want to save it.

However, the current economic climate may make employees less inclined to jump ship. Fear of redundancy, need for security and a stagnant housing market may result in the workforce keeping hold of what they have. An incoming management may thus find its staff readier to accept new roles than was the case in easier times.

One significant area of difficulty may be a lack of match between company cultures, especially if the merger is between companies of two nationalities. The differences in working cultures across the world are so well documented that it is naïve to believe that two such organisations can come together without some element of friction. Even within an organisation, there may be cultural differences between divisions (for example, between R&D and sales and marketing); and while the combination of different business cultures can be healthy, care needs to be taken to avoid conflict. A new catalogue of medical devices may seem to be what will motivate a sales force – but will they welcome the breakup of trusted organisational structures?

Even the best crystal ball can never show you how the company will look after the deal goes down.

The wages of synergy

In conclusion, the management and employees of the medical device industry need to recognise that consolidation is here to stay for the time being. With the current lack of bank finance for higher-risk operations, it may be the only way to avoid complete annihilation of a business. On paper it frequently makes good sense – and if there were no value in the activity, why would organisations keep on doing it? In these competitive times, organic growth is very diffi cult, and a partnership may bring the growth and critical mass necessary for operations to maintain profitability.

But... well, the ‘but’ is harder to define. There is always a human cost when two organisations become one. Talk of ‘synergy’ and ‘partnership’ may sometimes misrepresent a relationship in which one partner is dominant. The best way to survive the process is to be ready for all contingencies.

In fact, you need to have three alternative plans worked out in advance. Plan A is to decide how, in your current role, you will merge yourself into the new organisation and maximise your usefulness. Plan B is to find out how you can adapt to alternative roles within the new structure. Plan C is to identify how you can transport your skills to an alternative environment.

Even the best crystal ball can never show you how the company will look after the deal goes down.

Brad Abbey entered the healthcare industry after deciding that the decadent excesses of his life as a cutting-edge heavy metal guitarist no longer suited. Having qualified with a Ph.D. in media studies, he has filled many roles in the industry, often having to leave them at short notice.