Mergers occur when two or more physician groups create a new and larger business entity that combines the resources of the original practices. While physician group mergers can have a profound impact on the business, too often dermatology practices view the merger itself as the strategic end game. Successful groups, however, understand that the deal is a means to an end and not an end in itself. The process of merging practices can go off without a hitch, but this is not always the case.
Dermatology practices looking to combine efforts may run into certain problems along the way, such as:
Differences. One of the primary reasons that mergers sometimes fall apart before they can ever be completed is the differences between those attempting the merger in the first place. Differences in opinion or management style may cause potential partners to fail to see eye-to-eye, causing merger negotiations to break down. This can happen for other reasons as well. Differences in personality may cause two potential partners to part ways, even though it may be mutually beneficial to combine their efforts.
Culture. Differences in corporate culture from one organization to the next also can pose problems for dermatology practices looking to combine efforts and resources. This is closely related to the differences seen between future partners, but it applies to the entire organization as a whole, rather than the differences between those at the top of the “corporate” food chain. The ability to combine two dermatology practices with seemingly polar opposite cultures requires both planning and a certain level of artistry. Cultural differences can threaten the outcome of a merger.
Integration. One of the most significant problems that can occur is the necessary post-merger integration. Dermatology practices that combine their efforts and resources must learn to do so by bringing all of the constituent elements of their practices together. This is easier said than done. The amount of planning and negotiating required to bring this about is fairly significant and usually takes place during the merger process. This integration planning is closely related to cultural issues because it requires those involved in the planning process to determine what the resultant culture will look like after the merger. You should NOT complete the legal merger documents without discussing integration plans with the other practice (preferably facilitated by an experienced consultant).
Synergies. Practice leaders often make simplistic and optimistic assumptions about how long it will take to capture synergies and how sustainable they will be. These synergies can come from economies of scale and scope, best practice, the sharing of capabilities and opportunities, and often the stimulating effect of the combination on the individual dermatology practices. However, it takes only a very small degree of error in estimating these values to cause an acquisition effort to stumble. It is important to be realistic about timing. Persistent management attention is needed to capture them.
The most successful dermatology practices link effective strategic formulation, pre-merger planning, and post-merger integration. These three components are critical for success:
- A vision, strategically formulated, for where the practice is going and how the deal fits. Practices then identify the appropriate targets and get the deal done.
- A pre-merger process that targets dermatology practices with the right capabilities, gets the deal done, and begins the integration through rigorous planning and building of trust among the players.
- A post-merger process that seeks to capture well-defined sources of value and is led in a way that captures as much value as possible as quickly as possible.
The merger will work best if both dermatology practices agree on the vision for the overall practice going forward and where the acquisition fits into that vision. Unfortunately, for many dermatology practices, the vision and true strategy work is begun after the acquisition. Too often the transaction focuses on the numbers without regard to the hard work of creating market-disrupting strategies. The result is an underperforming merger.
Mergers represent a challenging and risky strategic decision. The decision to merge should be fully challenged from several angles before dermatologists decide to go ahead, particularly given the average performance of the returns and the risk associated with the potential outcomes. Even with thoughtful planning and preparation, best practices, and focus, success is not guaranteed. However, applying the best practices should enhance the chances of success and help avoid catastrophic pitfalls. To avoid a transaction failure, practices need to think about integration through every step of the process.
Acquiring another practice can be a powerful tool for your group to achieve growth and build long-term value. The following are three common mistakes I see that could be avoided with more thoughtful reflection.
- Failing to define a vision—before the integration occurs. Crafting a vision that clearly spells out the opportunity inherent in the transformation ahead should, but often does not, start long before a deal is pursued. Drawing from an “expanded due diligence” process that explores quantitative metrics, such as dermatology practice operations and financials as well as the people and culture of the merged entity, is key.
Leaders must build and communicate a vision of success that is understandable, tangible, and compelling to employees throughout the ranks of both practices. Factoring in the value of the people, assets, and cultural elements of each practice will empower leadership to look beyond the basic additive advantages of the deal and construct a more holistic vision—inspired by both head and heart—for the opportunity ahead.
- Forgetting to ask: “What more could we become together?” The single biggest pitfall that derails successful transactions occurs during the actual integration process. Those involved often focus too heavily on ensuring the tactical aspects of the deal are covered, including technology integration, financial reporting, operations, and merging organizational structures. As mentioned above, you are setting the merger up for failure if the post-merger integration items are not decided upon before the consummation of the merger.
The real power of any dermatology practice merger comes from both practices challenging each other to ask: “What more could we become together?” How can each practice learn from the best of each respective practice and let go of old biases? This will build the two parts into a better whole. Viewing the integration process through this lens will help build collective urgency and alignment around shared goals and generate excitement among employees for the new entity’s future.
- Underutilizing your people to drive change. Throughout the merger integration process, leaders at each practice should deliberately involve all staff to help facilitate change. The practices should empower employees at all organizational levels to join and lead a volunteer army to accelerate the transference of ideas and inspire the desired culture of the new combined practice.
With so many moving parts throughout the process, empowered employees working as informal networked groups can work with agility and adaptability to help the two dermatology practices gradually become one.
One simple but effective way to ensure a successful acquisition is to study why others have failed and do something different. Here are nine common root causes of failed acquisitions:
- Strategy: Poor strategic logic or fit. No strategy used to determine goals of integration.
- Synergy: Overestimation of potential synergies or underestimation of synergy complexities or timetable to delivery.
- Culture: Fundamental incompatibilities (including buyer’s lack of self-awareness), ineffective integration, or squelching positive attributes of target’s culture in name of uniformity.
- Leadership: Weak leadership, delays in appointing new leadership team, loss of key talent, insufficient participation in the transaction and integration process, ego clashes, or failure to deliver on pledges.
- Transaction parameters: Overpaying, inappropriate deal structure, or endless negotiations that bleed both practices dry.
- Due diligence: Insufficient investigation (especially little or no strategic and operational due diligence), or failure to translate findings into actions.
- Communications: Failure to communicate with sufficient transparency, awareness, depth or frequency, failure to take key messages to appropriate stakeholders, failure to address the concerns of each group with targeted yet strategically consistent messaging, or making empty promises.
- Key talent: Failure to identify key personnel or failure to act swift enough to retain them.
- Technology: Failure to identify fundamental incompatibilities (poor due diligence) or underestimating complexities or time required for system integration.
So, how can you avoid these problems? Successful acquirers embrace the process of integration as the single-most powerful value creation tool available and view their investment in integration as one of the elemental costs of doing a deal. They understand that integrating and operating are two different processes, with unique objectives and which require separate attention and separate skills.
Running a practice is an ongoing process aimed at optimizing an existing set of circumstances. Merging two dermatology practices is a temporary process aimed at changing those circumstances. Running a practice is a recurring evolution. Acquiring or merging is a finite revolution. The two have different objectives and require different approaches altogether.
Ideally, integration insight is woven into virtually every step of the acquisition process. It is incorporated into the strategic thinking and target identification as well as into the due diligence and the valuation process. It plays a huge role during the months before and after closing, and it carries on long after the deal is done and the bankers and lawyers have all gone home. Thinking about integration at every step in the deal process will help dermatology practices avoid transaction failure. n
Mr Hernandez is the chief executive officer and founder of ABISA, LLC, a consultancy specializing in strategic health care initiatives (www.abisallc.com).
Disclosure: The author reports no relevant financial relationships.