TCIV Spotlight: Behavioral Health M&A Activity Slows in Q3

Merger and acquisition activity in the third quarter of 2019 suggests buyers are tapping the brakes on their dealmaking in the behavioral healthcare space, per data in a report published by healthcare M&A firm Mertz Taggart.

Overall, the third quarter saw 19 behavioral healthcare deals, down from 25 deals in the second quarter. That puts 2019 on pace for about 77 behavioral health transactions, which would be down from the 97 reached in 2018.

While behavioral healthcare M&A activity has showed signs of slowing, deals for providers of autism services have bucked that trend, carried in large part by acquisitions being made by Kadiant and Blue Sprig Pediatrics, according to the Mertz Taggart report.

Next month at the Treatment Center Investment & Valuation Retreat in Scottsdale, Arizona, Kevin Taggart, CM&AP, and his fellow managing partner Cory Mertz, M&AMI, will be joined by Evan Baldwin, president of the New Mexico Society of Addiction Medicine, and Peter Thiessen, vice president of corporate development at BayMark Health Services, to dissect the process of mergers and acquisitions and share lessons they've learned completing deals.

Ahead of his appearance at TCIV, Taggart spoke with BHE about the findings in his firm’s recently published report.

Editor’s note: This interview has been edited for length and clarity.

Are there trends or developments that you’ve seen in 2019 that have been surprising?

The one thing that has surprised me a bit is how quickly the traditional substance use space has cooled off. That came on quicker than I would have guessed. We anticipated it would go down at some point, but just how quickly it slowed down surprised us.

Do you have a theory or rationale for why behavioral healthcare transactions overall seemed to cool off in the third quarter?

A lot of it is the last couple years, there have been some big buyers who have been pretty acquisitive. A lot of those buyers are…I don’t want to say struggling, but they’re not necessarily hitting their plan they had projected they were going to hit. So, I think a lot of them have somewhat hit pause while they digest some of the other acquisitions they’ve done and get their internal house in order. That’s part of it. Also, for investors out there, [American Addiction Centers] is the only pure play public company, and obviously they haven’t done well the last couple years. I don’t think that has been helpful. And, third, a lot of treatment centers are trying to find their way as well, especially the ones that are out of network and trying to get in network and trying to get that model to work for them. We have gotten lots of calls over the past year from treatment centers that are struggling for one reason or another. Most of it seems to be not that they’re not getting paid, but it’s getting beds full. That’s where we see most of them struggling a bit.

Do you think what we’ve seen in the third quarter is an anomaly or a sign of where the industry is headed?

I don’t think it’s going to cool off. Frankly, I think things have settled a bit. I think we might have another quarter or two where it’s a bit flat, but the need’s not going away. So, I do think that at some point, it’s going to come back in 2020.

One area that seems to have gone against the trend we’ve seen with behavioral healthcare overall is autism services. There has been a lot of activity in that space, with a few companies in particular that have been especially active. Any thoughts on why M&A activity around autism services continues to make waves?

That’s a good question. I don’t know if it’s that the demand has seemed to increase for one reason or another. I don’t know if it’s just that more people are aware that the services are out there. Some of the payers have come around in the last couple years and are actually starting to pay for the services now, the commercial payers. That’s part of it. There is a lot of private equity money chasing them, and it’s a very fragmented, small mom-and-pop industry. That’s part of it. It’s supply and demand. There’s just not enough supply for the 20 or so private equity-backed autism platforms. That’s a lot of private equity chasing too few deals, really.