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 / Summer 2009 / Issue 55(originally published by Booz & Company)


Making the Most of M&A

Health Care: Continued Consolidation
by David G. Knott, Charles Beever, and Danielle Rollmann

Despite a challenging economic climate, merger and acquisition activity in the health-care sector remains relatively buoyant. Based on our conversations with industry leaders, we perceive a growing momentum to reevaluate corporate portfolios and to exploit today’s stock prices to build capabilities quickly. It is still uncertain, however, whether M&A activity will change the underlying dynamics of the industry.

We expect consolidation to continue in every health-care sector. Already, pharmaceutical companies have undertaken some significant M&A actions: the Roche/Genentech, Pfizer/Wyeth, and Merck/Schering-Plough deals, as well as a series of smaller biotechnology acquisitions. In the United States, we expect health-care providers, most notably hospitals, to increasingly consolidate in some form over the coming years, given their significant capital needs at higher costs, their eroding financials, and their need for additional clout with, or bargaining power relative to, dominant local payers. U.S. health insurance plans are looking for greater scale as well as new capabilities in areas such as utilization management, health information technology, and patient education and management.

An open question is what model of cross-sector industry engagement we will see going forward after M&A. Will bare-knuckled competition continue, but with larger players? Or will the titans of this industry focus on the programs and collaboration across the industry that will drive true improvements in health-care delivery, outcomes, and cost?

Much has been said about the burden of health-care costs on the U.S. economy. Press coverage continues to focus on the high cost of pharmaceuticals, but more than 80 percent of national expenditures for personal health care consist of costs associated with the delivery of care via hospitals, physicians, clinical services, nursing homes, and home health agencies.

To date, we have seen a variety of experiments intended to reduce costs and improve quality. These involve technologies such as remote monitoring tools, along with new low-cost delivery channels such as retail clinics, medical malls, and concierge services. Potentially transformative approaches such as evidence-based medicine and electronic health records hold promise for improving quality and reducing demand and costs.

However, scaling these experiments up to establish a new operating model for the industry will require fundamental changes in delivery and financing, new alliances and collaborations among stakeholders, and greater levels of investment. We are beginning to see the emergence of such a new operating model, one focused on creating value by collaborating to improve clinical and cost outcomes. Realizing this potential will require stakeholders to build new capabilities. For example, health plans will need to improve customer service for their more engaged consumers, enhance their utilization management, develop better wellness and disease management programs, and make use of informatics and patient-centered technologies. Pharmaceutical companies will need to enhance their ability to work with payers and other stakeholders to demonstrate the value of their products.

Much of this capability-building will occur through M&A. A recent Booz & Company research study analyzed health-care M&A deals since 1995, identifying the strategies that distinguished the biggest winners from the biggest losers in terms of stock performance one year after an acquisition. Strategies were classified according to whether the companies were in the same sector (a consolidation strategy), adjacent sectors (capability building), or unrelated sectors (diversification). The largest group of deals was made up of consolidations, and the numbers of winners and losers with this strategy were even. By contrast, those companies aiming to build capabilities had 38 percent more winners than losers, despite paying the highest multiples for targets.

In the future, therefore, we believe the winners in health care will be companies that systematically integrate an understanding of the capabilities required to win in the market with a well-structured, well-executed acquisition and alliance strategy.

  • David G. Knott, Ph.D., is a senior partner with Booz & Company based in New York. He leads the firm’s global health-care business and specializes in strategy and transformation programs for the firm’s payer clients.
  • Charles Beever is a partner with Booz & Company based in New York. He has more than 20 years of experience serving U.S., European, and Japanese pharmaceutical, biotechnology, diagnostic, health-care, and medical device/supply companies.
  • Danielle Rollmann is a partner with Booz & Company based in New York. She focuses on business growth and sales and marketing, helping clients understand and develop strategies and then build the capabilities to execute those strategies.
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  1. Gerald Adolph and Justin Pettit, with Michael Sisk, Merge Ahead: Mastering the Five Enduring Trends of Artful M&A (McGraw-Hill, 2009): Context, business cases, and practical advice for the growth strategist.
  2. Irmgard Heinz, Jens Niebuhr, and Justin Pettit, “Six Rules for the New CFO,” s+b, Winter 2008: How CFOs can be more effective merger strategists, synergy managers, and business integrators.
  3. Robert Hertzberg and Ilona Steffen, editors, The CFO as Deal Maker: Thought Leaders on M&A Success (strategy+business Books, 2008): In-depth interviews with 15 leading chief financial officers on successful M&A. Source of several quotes in this article.
  4. For more business thought leadership, sign up for s+b’s RSS feed.
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