Health services: US Deals 2024 midyear outlook

M&A activity shows stamina across health services

Health services deal volumes through April 30 declined by a modest 4 percent from 2023 levels, demonstrating continued resilience coming off the peak volumes of 2022. While the sector continues to be impacted by headwinds including increased regulatory pressure, dealmakers have become more accustomed to the current interest rate environment and have adapted to the correlated decline in price to earnings multiples.

These factors, combined with broader market tailwinds such as capital availability and a need for sponsors to facilitate exits and return capital to limited partners, should continue to bolster deal activity throughout 2024.

  • Deal volumes through April 30 are largely consistent with 2023 levels, and while volumes have declined from the 2022 peak, they remain nearly twice the pre-COVID levels.
  • Megadeals are subdued relative to 2021 and 2022 levels, with three megadeals completed in the 12 months ended April 30, 2024.
  • Public company enterprise value to earnings before interest, taxes, depreciation, and amortization (EBITDA) multiples have declined across nearly all subsectors, resulting in an average multiple of 13.2x as of April 30 versus 14.2x the year before.
  • Despite the sector valuation declines, transaction volumes have remained steady, indicating acceptance of the higher-for-longer interest rate environment and a narrowing valuation gap between buyers and sellers.

Strategy alignment and capital availability continue to drive M&A volumes

Corporations have a significant amount of cash on their balance sheets to pursue acquisitions, while private equity and venture capital firms continue to hold near record-level capital on the sidelines. Corporates continue to focus on divesting underperforming businesses or those that no longer fit with strategic priorities, while sponsors are looking to divest longer-held portfolio companies to return capital to investors.

As we’ve highlighted in past outlooks, non-traditional deals continue to drive activity within the health services sector, whether it be transactions with alternative financing structures, carve-out transactions, the continued influence within the sector of non-customary players such as retail operators, or strategic cross-sector deals including partnerships, coinvestments or joint ventures between not-for-profit and for-profit entities. We expect these non-traditional deals to continue driving activity in the sector throughout 2024.  

Keeping watch on regulators, technology disruption

What’s now?

Increased regulatory review continues to be top of mind for dealmakers in the health services sector, with regulators focused on cost of care as well as health equity and access to care. This is occurring at the federal level with Federal Trade Commission (FTC) antitrust cases, and increasingly at the state level, including recently introduced legislation in California and other states that would provide further oversight over transactions between private equity or hedge funds and health care facilities or provider groups. These regulatory actions illustrate the increasing level of review applicable to private equity transactions within the health services sector. The potential effects on deal flow will be a focus point over the coming months for all investors, but particularly for sponsors.

What’s next?

Executives understand the importance of transactions to reshape their businesses and growth strategies in keeping pace with changing market dynamics. The challenges and headwinds discussed previously, combined with broader macroeconomic uncertainty, have led to processes moving slower than buyers and sellers would like. Diligence preparedness and a quality go-to-market strategy will be critical for both corporations and sponsors alike to avoid surprises during diligence and minimize lengthy processes.

Additionally, as is the case in all sectors, technology continues to accelerate business model reinvention. While still in its early stages, generative AI (GenAI) is expected to drive productivity gains, reduce administrative costs and improve the healthcare experience across payers, providers and patients. In a sector with labor supply challenges, the ability to stimulate productivity improvements will be vital and serve as a differentiating capability for high-value targets. Dealmakers should perform adequate diligence on AI-related capabilities and continue to increase scrutiny on cybersecurity programs in response to the growing prevalence of cyber attacks on health services businesses.   

“Regulatory actions and other macro variables continue to drive cautious dealmaking activity, but the sector continues to remain resilient against these obstacles.”

— Nick Donkar, US Health Services Deals Leader

The bottom line

Sector activity continues to be robust relative to the pre-COVID period and valuation multiples are aligning, with dealmakers acknowledging the financing constraints imposed by the higher-for-longer interest rate environment. Non-traditional financing and structuring approaches will continue to be employed in response to these macroeconomic factors and we expect alternative deal structuring in response to legislative and executive actions that may be implemented at both the federal and state levels.

Despite these challenges, the sector continues to be resilient with high levels of activity driven by the continuing tailwinds from demographic trends, Centers for Medicare & Medicaid Services (CMS) targets for moving fee-for-service members into value-based care arrangements, and continued innovation in the sector aimed at achieving the quadruple aim of enhancing patient experience, improving population health, reducing costs and improving the work life of health care providers.

Explore national M&A trends

About the data

LevinPro HC: The merger and acquisition data contained in various charts and tables in this report have been included only with the permission of the publisher, Irving Levin Associates LLC. All rights reserved.

S&P Capital IQ: Information provided by or through third parties is provided “as is,” without any representations or warranties by PwC or such third party. PwC and such third parties disclaim any contractual or other duty, responsibility or liability to client and any person or entity that receives such information.

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