Becker's Hospital Review

15 Financial Management H ospitals and health systems join together for a variety of reasons. Although ev- ery merger is different — as each is tailored to the unique needs and traits of the participating organiza- tions — more systems are seeking partners to break from the past. Capital needs and financial distress will continue as principal drivers of hospital and health system transactions. However, in an era when the industry is collectively shifting focus and investments toward lower cost, value-based care and population health management, even financially successful organiza- tions see the value in joining forces with other sys- tems whose resources and scale complement their own. In a "merger of equals," hospitals and health systems have an opportunity to achieve this. "Mergers of equals allow healthcare leaders to move their organizations through a period of change, even when they are [already] successful," says David Jarrard, CEO of Jarrard Phillips Cate & Hancock, a healthcare strategic communications firm based in Brentwood, Tenn. "Often, change is needed because one system is struggling or something isn't work- ing. But sometimes the hardest change has to occur when the organization is still vibrant and successful in the current business model." According to Mr. Jarrard, smart leaders look ahead to the future and seek ways to create new business models that are best suited to meet future demands. A merger of equals, also commonly referred to as a founder transaction or simply consolidation, does not follow a traditional acquisition or merger mod- el where there is a perceived "winner" or "loser," or when one system simply hands over its keys to the other, ready to be completely absorbed into the dominant organization's management and finan- cial system. Instead, a merger of equals is driven by shared strategic imperatives and an understanding that each participating system can contribute valu- able resources to meet mutual goals. "It isn't about 'our way' or 'their way' but creating a new way to better serve the community," Mr. Jar- rard says. "Mergers of equals can take down barriers and silos and old ways of thinking." What is the definition of 'equal'? "Equal" is not a mathematical or legal term in this ap- plication. Rather, a merger of equals connotes the two or more organizations approaching the merger do so with the understanding that they will wage equal au- thority in the development of the deal and the new system's management, according to Mr. Jarrard. While one system may be larger than the other and have more capital or clinical programs of higher quality, if two organizations seek to join forces to create a new system, they must see themselves as equal partners. Instead of imagining two equal halves forming a whole, a merger of equals can be more accurately depicted as two jigsaw pieces fitting together, as both parties complement and recognize the value of their combined resources. According to Jim Blake, managing director of Kaufman Hall, there are three main criteria a deal must satisfy to be considered a merger of equals. First, the two or more participating entities must be motivated by the goal of creating a new and bet- ter system for delivering care, not just for acquiring scale. The transformational aspect is key. Second, a merger of equals is a non-value-based transaction. "Unlike most transactions where there is a transfer of value from one system to another, the worth of each organization is not the focus in these discussions," Mr. Blake says. The third criterion is that as a non-value-based transaction, the board seats are not determined based on value, meaning the two or more organi- zations creating the new system each contribute an equal number of board members. "The most successful deals aren't created from conversations where people are asking, 'What can I bring to the table?' but, 'Now that we're at the table, what can we create?" says Mr. Blake. One timely example of such a deal is the pending merger between Downers Grove, Ill.-based Advocate Health Care and Evanston, Ill.-based NorthShore Uni- versity HealthSystem. The consolidation of the two individually successful systems, currently under fur- ther review by the Federal Trade Commission, would create the largest healthcare delivery system in Illinois and the 11th largest nonprofit system in the U.S. According to a statement from NorthShore, the agreement "outlines plans to consolidate balance sheets and a single board of directors, as well as a unified mission, vision and strategy." Jim Skogsbergh, president and CEO of Advocate, and Mark Neaman, president and CEO of NorthShore, will serve as co-CEOs for a designated timeframe, and the new Advocate NorthShore Health Partners system board of directors will be made up of an equal num- ber of members from Advocate and NorthShore, ac- cording to a statement from NorthShore. According to Jordan Shields, vice president of Ju- niper Advisory in Chicago, "The most successful consolidations don't have winners or losers. They have two partners that come together and share a vision for healthcare in their communities — it is a vision for the future that isn't based on their pasts." Designing a merger of equals When one party approaches the other about con- solidating, they establish at the beginning that the deal is not a take-over for either one, Mr. Blake ex- plains. Because of this, it does not matter who first proposes the idea to merge. In traditional mergers and acquisitions, CEOs or board chairs can take the deal fairly far before needing to seek approval from the board, whereas in a merger of equals, the board must be included much earlier on. "The very identity of who you are will change in doing this kind of transaction," says Mr. Blake. "Both parties must ask if they're ready for that. It's the board's decision, not just the management's de- cision. The deal could be changing something that's been in place for 100 years." Doors By Tamara Rosin

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