A new report by Rock Health describes mergers and acquisitions as a new way to invest in digital health. It takes place despite a significant slowdown in digital health investments. The following are key merger and acquisition trends in digital health:
- Mergers and acquisitions in the digital health sector averaged nearly 23 deals per month in 2021, for a total of 273 transactions.
- A monthly average of 23 digital health mergers and acquisitions was recorded in January and February of 2022.
- During the second quarter of 2022, economic headwinds caused digital health mergers and acquisitions to decline to 13 deals per month.
- With an average of 15 deals per month in the third quarter of 2022, there have been 144 digital health mergers and acquisitions in the first three quarters of 2022.
- The report expects this trend to continue into the fourth quarter of 2022, with merger and acquisition deals continuing to increase.
Rock Health’s latest report identifies four archetypes of digital health buyers capitalizing on sell-side interests to meet the following operational needs:
1. Consolidation for inorganic growth:
‘As some digital health startups contemplate exiting the private market to avoid an austere funding climate, others are looking to weather the market by acquiring their competitors, leading to waves of sector consolidation. From the buyer’s perspective, consolidation is a useful approach to grow one’s customer base and build confidence from investors looking for growth indicators.’
2. Acquisitions to enhance core operations and internal efficiencies
‘The second acquisition strategy involves purchasing digital health startups that enhance or streamline the acquirer’s core operations, ideally offsetting the cost of acquisition with the bottom-line savings that would result from new internal efficiencies. Interestingly, many acquirers pursuing this type of M&A approach are provider organizations, which are battling staffing cost surges and rollbacks in post-pandemic relief funding.’
3. “Buy and build” deals for category expansion
‘ A third acquisition strategy involves buying digital health companies with features complementary to the acquirer entity—empowering the acquirer to move more freely upstream or downstream in the care delivery value chain. This stepwise strategy can help acquirers capture market share in adjacent care categories.’
4. M&A for disruptive innovation
‘As interest rates have continued to soar, the relative cost of capital has increased in tandem. With the days of easy money in the rear-view mirror, Rock Health hypothesize that the players best positioned to make headline-grabbing M&A deals are primarily those who used the heady times of 2021 to accumulate and hold serious cash reserves.’