M&A challenges from Tier-II and Tier-III cities

At the start of 2022, dealmakers were riding high from the best year on record for global mergers and acquisitions (M&A), with more than 60,000 publicly disclosed deals breaking USD 5 trillion in value for the first time. Despite challenges, such as rapidly accelerating inflation and interest rates, lower stock prices, and the energy crisis deepened by the Russia–Ukraine conflict, it is believed that M&A will play an increasingly important role in corporate strategies. To generate healthy returns in today’s environment, as valuations come down. Indeed, dealmakers have good reasons to reset their strategic priorities and make bold moves to get deals done in the areas of their mergers and acquisitions pipeline that matter the most. M&A volumes and values tend to rise in periods of economic growth and favorable markets and decrease during times of uncertainty and market volatility. It should be no surprise, therefore, that M&A softened during the first half of 2022. Dealmakers are facing higher costs of capital and increasing pressure on returns, and their boards, and investment committees may be advocating for caution, even delays, in M&A pipelines, as rising inflation, concerns over energy supply, labor shortages, and supply chain disruptions put pressure on balance sheets and put longer-term priorities such as deals on hold in various industries. However, healthcare markets in developed countries have become increasingly concentrated; at the same time, M&A in these markets have been increasing.

Hospital M&A are increasing at a rapid rate. Healthcare organizations announced 115 M&A transactions in 2017, the highest number in recent history. Healthcare organizations aim for high-value M&A to give their systems greater scale to reduce costs, offer additional care services, and create a larger footprint in the local market (Kaufman Hall Transactions Data, 2021). The diagnostics industry is worth approximately USD 11 billion; pathology comprises of 58 percent of the market with hospitals and standalone centers constituting more than 80 percent of the pathology market. The pathology market is still dominated by unorganized players having a 48-percent share of the overall market and organized players and regional chains that had a 15 percent market share approximately in India.

Three large M&A (Pharmeasy/Thyrocare, Dr Lal’s/Suburban, and Metropolis – Dr Ganeshan’s Hi-Tech) and select fund raising (Tata Cap/Atulaya Healthcare, Morgan Stanley/Sterling Accuris, Accel invested in Orange Diagnostics) witnessed maximum action after a long time. While there will be select consolidation opportunities this year. There will be more fund raising as select PEs will continue to back regional players. (Karan, S. and Vikram, C. (2021) Brain & Company) The competitiveness in the sector has increased significantly, with several hospital chains focusing on diagnostics (viz. Sahyadri Hospital, Manipal, Max, Medicover), along with several deep-pocket corporate houses investing heavily in diagnostics such as PathKind (Mankind), Unipath (INTAs), Lupin Diagnostic, Rivaara lab, and Bharat Serums Promoters. The new-age healthtech platforms have not been able to significantly dent the market. M&A of pathology testing companies in India are likely to become a dominant trend in the coming year. The impact post-M&A on the smaller players in Tier-II and Tier-III cities due to cultural gaps, integration failure, and due diligence is creating a lot of uncertainty among all stakeholders. The future of the diagnostics industry in India is changing rapidly owing to M&A.