Non-Profit M&A: Benefits and Pitfalls Analyzing Tax, Accounting - - PowerPoint PPT Presentation

Non-Profit M&A: Benefits and Pitfalls

Analyzing Tax, Accounting and Business Aspects of Partnerships With Other NPOs

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

WEDNESDAY, FEBRUARY 20, 2013

Presenting a live 110-minute teleconference with interactive Q&A

Michael Peregrine, Partner, McDermott Will & Emery, Chicago Barry Sagraves, Managing Director, Juniper Advisory, Chicago Dan McCormick, CEO, McCormick Group, Fripp Island, S.C.

For this program, attendees must listen to the audio over the telephone.

Tips for Optimal Quality

Sound Quality Call in on the telephone by dialing 1-866-873-1442 and enter your PIN when prompted. If you have any difficulties during the call, press *0 for assistance. You may also send us a chat or e-mail sound@straffordpub.com immediately so we can address the problem. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

Continuing Education Credits

Attendees must stay on the line throughout the program, including the Q & A session, in order to qualify for full continuing education credits. Strafford is required to monitor attendance. Record verification codes presented throughout the seminar. If you have not printed out the ―Official Record of Attendance,‖ please print it now (see ―Handouts‖ tab in ―Conference Materials‖ box on left-hand side of your computer screen). To earn Continuing Education credits, you must write down the verification codes in the corresponding spaces found on the Official Record of Attendance form. Please refer to the instructions emailed to the registrant for additional

• information. If you have any questions, please contact Customer Service

at 1-800-926-7926 ext. 10.

FOR LIVE EVENT ONLY

Program Materials

If you have not printed the conference materials for this program, please complete the following steps:

• Click on the + sign next to ―Conference Materials‖ in the middle of the left-

hand column on your screen.

• Click on the tab labeled ―Handouts‖ that appears, and there you will see a

PDF of the slides and the Official Record of Attendance for today's program.

• Double-click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.

Non-Profit M&A: Benefits and Pitfalls Seminar

Barry Sagraves, Juniper Advisory LLC bsagraves@juniperadvisory.com

• Feb. 20, 2013

Dan McCormick, McCormick Group danh@mcc-group.com Michael Peregrine, McDermott Will & Emery mperegrine@mwe.com

Today’s Program

Types Of Business Relationships To Consider [Dan McCormick] Leading An Organization Into Merger Consideration [Dan McCormick] Latest Trends And Events In This Area [Barry Sagraves] Legal Issues In M&A, For Non-Profits Generally [Michael Peregrine] Financial Impact, Process, Pitfalls In Non-Profit M&A [Barry Sagraves] Governance, Due Diligence And Board Responsibility Issues [Michael Peregrine] Slide 8 – Slide 12 Slide 60 – Slide 66 Slide 13 – Slide 19 Slide 20 – Slide 37 Slide 38 – Slide 49 Slide 50 – Slide 59

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

TYPES OF BUSINESS RELATIONSHIPS TO CONSIDER

Dan McCormick, McCormick Group

The Collaboration Continuum

The Collaborative Continuum

COMPLEXITY POTENTIAL BENEFITS

Initiatives Instruments

Communicate Service- Sharing Joint Ventures Shared Governance Merger

MOU/LOA* Contracts Legal Filings

* Memo of understanding/letter of agreement

9

Formal Collaborations Short Of Merger

I. Joint venture A. Two or more parties form an alliance to create or operate a new venture

• together. Each entity bring specialized skills and resources to the table.

II. Shared services A. Two or more parties agree to meld specific activities or programs into a single delivery or service system (e.g., accounts receivables and payables are handled by a centralized center).

• III. Shared governance

A. Two or more parties agree to establish an enterprise by melding resources and, more importantly, equally sharing governance and strategic decisions.

“More than 100,000 nonprofit groups nationwide will fail within the next two years, including a few "big brand-name nonprofits.”

• Paul C. Light, professor of public service at New York University

10

Collaboration Continuum (Cont.)

• As the opportunity for potential gain increases, so does the

complexity of the relationship.

• A collaboration can start at any point across the continuum

and does not suggest that it will proceed further.

• A contract for outsourcing, or melding specific budget line

items under a single management system, is a less complex

• ption but easier to dismantle.
• Sharing cost, oversight, operations management and

governance produces the best long-term relationships and builds trust.

11

Alternate Forms For Merger And Acquisition

• Merger (A>B=B) or consolidation (A+B=C)
• Consolidation usually cost more because of having to create a new

tax-exempt entity to house the new structure.

• Acquisition of transfer of assets followed by dissolution
• “Alliance,” contract, joint venture, LLC, etc.
• Umbrella entity with subsidiaries (ownership issues)

12

LEADING AN ORGANIZATION INTO MERGER CONSIDERATION

Dan McCormick, McCormick Group

Starting The Exploration

I. Assemble an exploration team II. Set reasonable expectations

• A. Outcome – timing – ultimate relationship
• III. Get the parties in a room
• A. CEO to CEO – volunteer to volunteer – third-party consultant to

help B. Informal exploration with no expectation other than determining real interests

• IV. Think about how you are “showing up”
• A. Be aware of the dominance of the large and the tyranny of the

small

“It’s not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.” - Charles Darwin

14

Reasonable Expectations

I. It’s all about your mission and how to advance your impact on what you are trying to achieve.

• II. Formal engagements are entered into for three primary

reasons:

• A. To acquire new skills, abilities and capacities or expand

the footprint

• B. To develop, with a partner, new skills and abilities that are

impossible or difficult to achieve on your own

• C. Preserve resources in a way that allows for impact on your

mission to continue and thrive

15

Assemble An Exploration Team

I. CEO and two volunteer leaders is an optimal make-up of an initial team. II. Set up a meeting with potential partners and ask them to bring the same type of team

• A. Sometimes, volunteer-to-volunteer is a better way to start.
• III. Keep the discussion at a very high level
• A. Talk about the vision of what might come from a discussion about

a deep formal collaboration or merger B. Remember, you are seeking agreement to continue to meet and explore, not to get closure on any concept, principal or negotiation point.

• IV. Don’t expect rip-roaring acceptance of the idea, concept or notion
• A. NPOs are fiercely independent.

16

How To Start The Discussion

I. It’s not your neighbor’s collaboration/merger. A. Our frame of reference is for-profit mergers that we know about or have experienced. B. NPO mergers are very different and can be formed to address “your” critical needs. 1. Legacy concerns can be met. 2. Protection of people and programs can easily be accomplished. II. Be open to lots of options A. Think of it as the design of something new, not negotiating to protect the old B. It doesn’t have to be competitive or contentious.

“Change is the process by which the future invades our lives.” – Alvin Toffler

17

Why Some Strategic Relationships Fail

I. Leadership changes II. Condition changes

• III. Rarely equal involvement (somebody gives or gets more)
• IV. No real lock on long-term commitment

V. It’s more like dating than a true partnership.

“The twenty-first century will be the age of alliances. In these complex times, no organization can succeed on its own.”

Harvard Business Professor and Author James Austin, The Collaboration Challenge: 18

The Process And Outcomes

I. Design as if the page is blank, and dream of a new state and structure II. Explore all primary aspects of the potential new relationship including branding, governance, functions, constituents and critical legacy interests

• III. Keep key volunteers and influential constituents up to speed as the

design begins to take form

• IV. After the design is almost complete, share with your board and
• thers to “test” for the acceptance of the concept and support

V. Remember, at the end of the day, nothing will change until votes are in; do not try to integrate prior to achieving the formal new state

19

LATEST TRENDS AND EVENTS IN THIS AREA

Barry Sagraves, Juniper Advisory LLC

Health Care Reform And The Fiscal Crisis

Healthcare Reform – Government Objectives

• Expand coverage through new insurance model for the uninsured and under-insured)
• Improve quality by implementing a system of rewards and penalties based on select quality measures
• Reduce government expenditures by changing the payment system from fee-for-service (DRGs) to pay-for-health

(population management) Healthcare Reform - Implications

• Hospitals will face lower revenues and higher costs.
• The change in payment from fee-for-service to quality/health-based will drive vertical integration, making physician

integration and recruiting increasingly competitive.

• Requirements for electronic health records will cause capital and operating costs to increase.
• Risk will be transferred from government and other payors to physicians and hospitals.
• Hospitals are actively exploring business combination opportunities seeking:

− Economies of scale: Access to capital, spreading overhead − Increase in scope: Physician integration, insurance, complexity

21

The Fiscal Crisis Part …

Source: U.S. Treasury Department, Government Spending Records

U.S. Federal Budget Deficit Gross Public Debt As A Percentage Of GDP

0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 Gross Public Debt

• 4.0%
• 2.0%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 Annual Deficit 22

… And Healthcare Is The Culprit

Source: U.S. Treasury Department, Government Spending Records

• 4.0%
• 2.0%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 Annual Deficit 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 1965 1967 1970 1975 1980 1985 1990 1995 2000 2005 2008 2009 2010 2011 Defense Social Security Health Services

Federal Spending By Department As A Percentage Of GDP U.S. Federal Budget Deficit

23

Slide Intentionally Left Blank

Potential Benefits Of A Transaction

• Economies of scale
• Access to capital/improve credit
• Cover additional geography or scope of activities
• Gain expertise, improve quality
• Financial distress

25

26

Benefits Of Scale For Financing

4.0

• 5.0
• 6.0
• 7.0
• 200

400 600 800 1,000 1,200 1,400 1,600 1,800 Aa A Baa Below Baa Total Opera ng Revenue Cost

• f

Debt

Revenue and Interest Rates by Rating Category

Source: Moody’s Median Report: Not-for-Profit Healthcare Medians August 25, 2010; Bond Buyer General Obligation 30-year bond yields June 28, 2011; Modern Healthcare, Not-for-profit downgrades outnumber upgrades, July 15, 2011

Revenue ($millions) Required Yield (%)

Source: Moody’s Municipal Financial Ratio Analysis database (fiscal year 2009 data)

System vs. Stand-Alone Bond Ratings

0% 10% 20% 30% 40% 50% 60% Aa A Baa Below Baa Health Care System Stand-Alone

Source: 2011 Citi Growth Study, data based on circa 245 reporting systems, health system data reflects average value of category versus aggregate average

Benefits Of Scale For Operations

• 150
• 100
• 50

50 100 150 200 250 300 Operating Margin Increase Cost of Debt Savings Supply Expense Savings Bad Debt Expense Savings Compensation Expense Savings

<$1 B $1-3 B $3-5 B >$5 B

• Five-year average annual benefit vs.

aggregate average

• Organizational scale:

Benefit Over Average

(Basis Points) 300 bps 200 bps 100 bps 0 bps

• 100 bps

27

20 40 60 80 100 120 140 160 180 200 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Number Of Transactions

Total Q1 Q2 Q3 Q4

Another Merger Wave

Source: Irving Levin Associates

External stimulus: Healthcare reform External stimulus: Managed care

= 89

Internal stimulus: Financial leverage

28

Industry Structure Is Remarkably Consistent

40% 49% 52% 55%

35% 40% 45% 50% 55% 60% 65%

Sources: American Hospital Association, Juniper estimates.

Proportion Of Hospitals In Systems Number Of Hospitals, By Category

Total: 5,031 4,680 4,582 4,541

29

Precedent Transactions Since 2001

0.30 0.40 0.50 0.60 0.70 0.80 0.90 TV/Revenue

Revenue Multiple

Mean Median 2.00 3.50 5.00 6.50 8.00 9.50 11.00 TV/EBITDA

EBITDA Multiple

Mean Median

Source: Irving Levin Associates Notes: Acute care hospital transactions where data was reported; outliers excluded

Valuation Ratios Have Increased

30

Important Developments In 2012

• Shift from “looking at options” to “finding a partner”
• Academic/tertiary – investor-owned joint ventures
• Duke LifePoint
• Aurora IASIS
• Catholic system mergers
• Ascension – Marian
• Trinity - CHE
• Catholic system “reinvention”
• Dignity
• (Small) moves toward multi-state non-profit systems and

payor-hospital combinations

31

Aurora – IASIS Joint Venture

• Largest non-Catholic

Wisconsin consolidator

• Owns 15 hospitals and 190

clinics and other facilities

• Mixed record of success with

new facility expansion (Grafton vs. Summit)

• Focused on high growth,

urban and suburban markets

• Owned by TPG, a $48 billion

private equity firm

• Consists of 18 hospitals, one

behavioral health facility and Health Choice, a managed Medicaid plan

Aurora IASIS Health Partners

• Joint venture was created as a response to “rapid and

fundamental” changes facing providers.

• Will initially pursue healthcare acquisitions, new construction,

management of facilities and development of clinical services

• Initial focus on “new and existing” markets in Wisconsin and

northern Illinois

• Launched with announcement of 11,000-square-foot cancer

center in Kenosha, where Aurora has a 73-bed hospital

• Other non-profit and investor-owned joint

ventures include: − Duke LifePoint (MI, NC, VA) − Integris – HMA (OK) − Ascension – Capella (TN) − Ascension Health Care Network (NJ) − Ascension – LHP (FL) − University of Florida – HMA (FL) − Seton – LHP (TX) − Children’s – Vanguard (PA)

• Provides Aurora with deep pockets to

continue to pursue an aggressive growth strategy

• Creates new buyer for potential sellers,

allowing them to maximize capital and price while accessing Aurora’s geographic synergies

• Strong signal that Aurora’s regional

expansion is just getting under way

32

Whole-Hospital Joint Venture

Capital And Operating Partner (usually for-profit) Subject Hospital Or Health System Newco Health System (joint venture)

• Ownership stakes can vary and depend on

contributions, but capital partner is usually the majority owner.

• Governance can also vary, but often are

50/50, with each party holding certain reserve powers. Hospital(s)

• May use JV vehicle to acquire

additional facilities Capital partner typically holds a management agreement with the joint venture. Contributes cash to JV Contributes hospital assets, cash or both to JV

33

“Buyer Joint Venture”

Capital And Operating Partner (usually for-profit) Subject Hospital Or Health System Newco Health System (joint venture) Target 2 51-80% GP interest (50/50 control) 51-80%

• f cash

20-49%

• f cash

Target 3 Target 1 20-49% GP interest (50/50 control)

34

Upper Peninsula Hospitals

35

Case Study: Marquette General

MGH Overview Process Overview

• Marquette General Health System
• Largest hospital and only tertiary provider in Michigan’s

Upper Peninsula (UP)

• One of the largest rural providers in the country
• ~$300mm in net patient revenue, 315 beds
• Employs 60% of its practicing physicians
• UP remains largely unconsolidated, presenting
• pportunity for suitor to grow a geographic system

around MGH.

• Stressed financial position
• 19.9-year average age of plant
• Underfunded pension
• Out-of-the-money interest rate swaps
• Significant outmigration (~$200mm) from UP
• Near-term financing issues required a partner willing to

retire or assume significant liabilities.

• Simultaneous, comprehensive, “fair” approach to market on
• Nov. 8
• Confidentiality agreement
• Instruction letter
• Information memorandum
• Data room information
• Broad participation achieved:
• 26 approached
• 18 confidentiality agreements
• 10 offers (eight for-profit, two non-profit)
• Wide range of structures and economic features
• Five finalists selected for additional review and negotiations
• Management meetings
• Reverse due diligence
• Revised, second round proposals
• Partner selected on Feb. 16
• LOI announced March 5
• Definitive agreement and closing Aug. 31

36

Case Study: Marquette General (Cont.)

• Client objectives - unique
• Significant capital investment
• Upgrade in medical capability
• Symbiosis regarding UP strategy
• Excellent market share, good market
• Significant deferred capital needs
• Highly customized approach and outcome
• Largest rural transaction in history
• Market-shaping academic joint venture

Suitor Evolution

• Simultaneous, comprehensive approach to market
• 27 parties approached
• 10 initial offers received
• No hybrids
• Effort to develop medical center partner
• Five finalists selected for additional review
• Management meetings
• Reverse due diligence
• Separate meetings to stimulate hybrid
• Juniper visits to Durham and Detroit
• Duke visits to Marquette
• New hybrid partner emerges among second proposals

Quality Capital Strateg y Capital Quality Strateg y Characteristics of buyer - typically mutually exclusive Identified suitor that met all MGHS board criteria Controlled competitive process 37

LEGAL ISSUES IN M&A, FOR NON-PROFITS GENERALLY

Michael Peregrine, McDermott Will & Emery

What’s New

• The dramatic increase in merger activity among non-profit

hospitals is prompting a new set of governance and transaction issues.

• Unique feature: The renewed popularity of the non-profit/non-

profit collaboration model

• Federal and state charity regulators are taking particular

notice.

39

Unique Timing Issues

• Managing the oversight needs of the board in the context of a

much compressed timetable

• Increased importance of letter of intent and mutual agreement
• n core issues
• Elevated importance of ―nondisclosure‖ and ―confidentiality‖

provisions of LOI

• Timing concerns with respect to rapidly consolidating markets
• Consideration of value of experienced project facilitator

40

Slide Intentionally Left Blank

Important Contractual Terms

• Uniqueness of non-profit to non-profit deals with ―cashless‖

consideration

• Critical to articulate governance-related terms
• Special considerations with faith-based parties
• Highly unique considerations when consolidating secular and

faith based parties

• Particular financial terms and conditions (see next slide)

42

Important Contractual Terms (Cont.)

― Access to obligated group membership ― Commitment to future capital expenditures ― Compatibility of IT systems ― Headquarters-related programs and services, allocations ― System/congregation-specific sponsorship fees ― Financial savings and efficiency commitments

43

Important Contractual Terms (Cont.)

• Interim conduct of business
• Role of representations and warranties
• Post-closing dispute resolution process
• Covenant enforcement rights and funding mechanism
• Termination rights
• Feasibility (or not) of ―unwind‖/break-up mechanism

44

Critical Approvals

• Informed board approval/closing resolution
• H/S/R
• State approval under formal or courtesy process
• Membership approvals
• Special religious sponsorship approvals
• Input/approvals of key vendors and lenders

45

Special For-Profit Partnering Considerations

• Reasonableness/fair market value
• Bid process/consideration of alternatives
• IRS joint venture standards
• Appreciation of role in joint venture governance and

management

• Fiduciary out/unwind/buy-sell provisions
• Enforcement provisions

46

Post-Closing Considerations

• Reporting to the attorney general
• Assuring compliance with post-closing covenants
• Responsiveness to potential parent-subsidiary fiduciary duties
• Re-orienting mission focus of new directors
• Addressing merger-related conflicts of interest

47

Unique Regulatory Considerations

• Increased antitrust enforcement at state and federal level

(early compliance is KEY)

• Increased review process (formal, informal) at the state

attorney general level

• Statutory conversion review and approval process
• Uncertain resolution of parent/subsidiary fiduciary duty status
• Increased focus on ―fiduciary out‖
• Recent judicial decisions re: ―walkaway‖

48

Looking Ahead

• When the ―merger music‖ stops playing (perhaps by early

2014), the non-profit healthcare sector will be consolidated into a much smaller number of larger, economically stronger charitable organizations.

• This will, in and of itself, create new regulatory (e.g.,

antitrust, charitable tax exempt status, compliance), corporate structure and governance challenges that will need to be addressed by leadership and the board.

49

FINANCIAL IMPACT, PROCESS, PITFALLS IN NON-PROFIT M&A

Barry Sagraves, Juniper Advisory LLC

Typical Transaction Issues

• Governance
• Size, structure and representation of the new board
• Reserve powers and block voting by the sponsoring organizations
• People
• Management roles
• Employee roles, benefits and seniority
• Strategy/fit
• Alignment of missions and objectives
• Service mix and locations
• Medical staff integration and alignment
• Transaction structure
• Legal and financial structuring
• Value, either for purchase consideration or board seats
• Disposition of liabilities, indemnification and covenants
• Communicating with key stakeholders — value of using a PR firm

51

Education And Objective-Setting

• Create a shared “baseline” of knowledge and perspective among the

board

• Major topics to cover:
• Healthcare reform, scale, access to capital
• Physician alignment
• Risk-based revenue models
• Potential transaction structures and issues
• Individual interviews with each board member
• Answer any remaining questions
• Provides opportunity to air views that may be difficult to raise in

a group setting

• Comments are unattributed and “off the record”
• Reach agreement on the Board’s preliminary objectives for a

transaction

52

Potential Transaction Structures

No Ownership Change Whole Hospital Joint Venture Consolidation Merger Outright Sale     

• Joint venture
• JOA
• ACO
• Asset sales
• Affiliations
• Restructure or reorganize
• Divest non-core assets
• Sale of 51% to 80% of equity
• Continued participation in
• wnership and governance of

the JV entity

• Cash transaction
• Equity recapitalization
• Combination of two entities

into a new company

• Cashless transaction
• Combination of two entities,

in which one acquires all of the assets and assumes all of the liabilities of the other

• Cashless transaction
• Sale of 100% of assets or equity
• Sometimes accomplished via

pre-paid lease

• “New” investor owned – non-

profit hybrids emerging

• Cash transaction
• No change in ownership
• No change in control
• Partial change in control
• Partial change in ownership
• Partial change in control
• Partial change in ownership
• Change in control
• Change in ownership
• Change in control
• Change in ownership

Pros

• Shared local control
• Strong partner with capital

access

• Management
• Scale

Pros

• Local control
• Scale
• Difficult transaction

Pros

• Local input
• Scale

Pros

• Maximize cash value
• Local foundation
• Straightforward
• Access to capital, management,

scale Cons

• Minority shareholder
• Inability to change partner
• Investment risk

Cons

• Difficult to negotiate
• Difficult transaction
• Sometimes not “enough”

Cons

• Shared or lost control
• No economic consideration

Cons

• Loss of local control
• For-profit
• Finality, shift in mission

Juniper client example: Methodist/San Antonio Advocate/Chicago Methodist/Peoria, Ill. Marquette General/Michigan

53

Transaction Process

Prepare to approach market

• Marketing strategy and prospective

partner list

• Internal due diligence
• Prepare information memorandum
• Establish procedures

Weeks, cumulative

15 - 18 13 - 16 30 23 - 26 9 - 11

DEFINITIVE AGREEMENT PREPARATION

17 - 20

INITIAL PROPOSALS FINAL PROPOSALS SELECT PARTNER LETTER OF INTENT GOVERNMENT APPROVAL(S)

4 6 - 8

APPROACH MARKET

• III.

[Transaction] II. [Marketing]

Select partner

• Evaluate final proposals
• Further negotiate terms
• Select preferred partner

Initial proposals

• Contact potential partners
• Confidentiality agrmt.
• Instruction letter
• Information memo
• Request proposals
• Select Phase Two

participants Refined proposals

• Procedures for Phase Two
• Company visits and

management presentations

• Solicit final proposals

OPTIONS ASSESSMENT

• Letter of intent
• Business agreement on key

economic and noneconomic terms

• Period of exclusivity
• Contingent on
• Confirmatory due diligence
• Definitive agreement
• Appropriate corporate and

governmental approvals Definitive agreement

• Binding agreement on

substantially all business and legal terms

• Often contingent only on

government approval Closing

• Resolve conditions to

closing

• Obtain state and

federal approvals

I. [Assessment]

Options assessment

• Comprehensive analysis of mission,

financial, and business situation

• Comparison of the pros and cons of

various potential alternatives

• Establish board’s objectives and criteria for

potential transaction

Board decisions – stop or proceed

54

Slide Intentionally Left Blank

Asset Sale Vs. Membership Substitution

Asset sale

• Cash purchase price
• Proceeds to successor

foundation

• “Pick and choose” assets and

liabilities

• Reps, warranties,

indemnification, escrows

• Fairness based on valuation

and/or process Membership substitution

• Usually no purchase price
• Like a corporate stock merger
• (Almost) all assets and

liabilities included

• Helpful to have successor

foundation, with or without assets

• Demonstrating “fairness” less

straightforward

56

Potential Pitfalls

• Mismatched expectations: “Merger” vs. “takeover”
• Lack of clarity regarding objectives
• Poor/unclear communication
• Liabilities:
• Swaps
• Pension
• Lack of preparation for gaining approvals
• Attorney General

57

Not Just Healthcare: Is Education The Next Area For Consolidation?

• Extremely fragmented
• Government-funded and/or supported
• Broad usership across economic spectrum
• Capital-intensive and labor-intensive
• Public, non-profit and government ownership

58

The Issues Appear Similar …

• Seismic demographic shifts
• Revenue and cost pressure
• Medicare/Medicaid/insurance subsidies
• Grant and loan guarantee programs
• Inflexible cost bases (tenure, unions, capital)
• Outdated(?) business models
• Increasing questions about relevance of major

components:

• Inpatient acute care
• Traditional four-year university

59

GOVERNANCE, DUE DILIGENCE AND BOARD RESPONSIBILITY ISSUES

Michael Peregrine, McDermott Will & Emery

Basic Considerations

• Non-profit hospital boards considering a merger or other

change of control transaction will be held to a higher standard

• f care, as part of the deliberative process.
• This applies regardless of the type of transaction model.
• Specific review obligations may differ, depending upon

whether one is pursuing non-profit or for-profit parties.

61

Basic Considerations (Cont.)

• Regulators and the courts often view complex and challenging

transactions such as change of control as imposing ―special

• bligations‖" on the governing board of the participating non-

profit.

• In such circumstances, enhanced ―special scrutiny‖ will be

applied to help ensure that the board and executive leadership have acted appropriately in considering the transaction.

62

Slide Intentionally Left Blank

A 10-Point Checklist Form: Informed Conduct

#1: What’s prompting the proposal? #2: Where did the proposal come from? Is there legal feasibility? #3: What are my basic review obligations? #4: Is there a simpler way to achieve the goal? #5: How will the board be positioned to review the proposal?

64

A 10-Point Checklist Form: Informed Conduct (Cont.)

#6: What kind of information should I be looking at? #7: What are my evaluation criteria? #8: Is this the same deal? #9: Do I understand the risks? #10: Am I ready to make an informed decision?

65

Special Factors

• Timing of board analysis - from the very beginning
• Board/negotiating team communications
• Clearing possible board, executive and advisor-level conflicts
• Ability to rely on advice of executives and consultants (with

limitation)

• Avoiding excessive deference

66