Executing M&A in Healthcare

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1:46I'm Kisan Patel, and you're listening to M &A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies, and what actually happened during M &A deals.

2:10Hello M &A scientists, welcome to the M &A Science Podcast, where we learn from the best in M &A to uncover proven techniques for enterprise value creation. If you're interested in learning more about the products and services we developed to service world-class M &A teams. If you want to get involved with our community of forward-thinking M &A practitioners, visit mascience.com. Get started by subscribing to our free weekly newsletter for the latest insights and events. Again, that's mascience.com. I'm your host, Kisan Patel, CEO and founder of M &A Science. Joining me today is Roy Schoenenberg, president and co-CEO at Amwell American Well Corporation, which is a telemedicine company that connects patients with doctors over secure video traded on NYSE under AMWL.

3:01Today, we're going to talk about how to execute M &A in the healthcare space. Roy, how are you doing today? I'm doing very well. It's good to be here. Thank you for taking a break from running a business, a public company, and doing M &A deals. Can we kick things off with a bit about your background? Sure. As you can hear from my accent, I wasn't born in the US. I was born in Israel. Lived there for a good chunk of my life, trained in medicine. And then somewhere in the midst of all of this, started turning to the dark side of technology and gradually did more and more of that. Started a company back in Israel, a technology company that did things with intensive care units and smart alarms and alerts and everything else.

3:39Our first customer was Mess General Hospital of all places. So I ended up traveling to Boston very frequently. And lo and behold, at some point, switched over from Israel to Boston, spent some time at a certain academic institution here, and then started another company that developed web-based medical record right when the internet was invented, before electricity was invented millions of years ago. Got that company done nicely and then started Amwell billions of years ago. And here we are right there in downtown Boston. So you got the bug. I do. Medical background and a startup bug. It's been a journey for you because you've been working at this company for a while, and then M &A came into play.

4:21How did that start evolving? First of all, I don't think that it's a tribute to our bright thinking when we started a telehealth company 15 years ago. COVID just happened two or three years ago and made this whole industry burst into flames. But we started Amwell in 2006. Just to give you a sense, the iPhone was introduced in 2008. So this is how bad our timing was in terms of being really early to the game. I think paradoxically, and I'm sure we're going to cover this at some point, paradoxically, having that amount of time ended up being very necessary when you want to do anything disruptive in healthcare.

5:00Because this industry, more than any other industry, is designed to reject change. For a good reason. When you go to med school, they teach you that any change in clinical practice needs to go through 50 different clinical trials and steps and approvals and everything else. It takes 10 years for a drug to hit the market in everything in healthcare. We do this not because of bureaucracy, but rather because we want to protect patients and not do anything different that may be harmful to them. That's true for technology in healthcare as well. So the fact, long story short, the fact that we started doing telehealth in 2006 actually allowed us to work very closely with the movers and shakers of the industry, not only pairs and provider organization, but also legislators, medical boards and others to really understand what's the right way to build it.

5:53And in turn, that allowed us to position ourselves hopefully on the right side of things and also really advise us in terms of our M &A approach through the years. Let's break down this healthcare space because I think there is some distinct differences. And you got this first one, the healthcare rejects changes. There's that component to it. Regulatory, I think, is probably pretty adjacent or maybe part of the reason why. Regulatory is driven, in my mind, by those two things, right? One is the patient safety, quality of the care, the access to care. Regulatory is very involved in this. And then the other piece of the regulatory effort is to make sure that the cost of this thing is contained to the extent that we can say that it's contained because it really isn't.

6:40We're not doing a very good job there. But a lot of regulation is around fundamentally the rules of engagement for Medicare and Medicaid, the government programs. but that sips into commercial very quickly. So the rules of right and wrong and where money can go and what investments can be made in many ways are driven by the regulatory climate that is, of course, influenced not only by the consumer side of things and the provider side of things, but mostly by the payer side of things in all the ways that Washington works. And that has definitely influenced fairly dramatically the evolution of digital care and telehealth and everything that we do.

7:21Yes, regulatory is a very big part of it. What else makes the healthcare space distinct? There's nothing like it. It's one of the only markets or industries, whatever you want to call it, where the people that consume the goods have no idea what they're consuming. The people, i.e. the patients, they just do as they're told. The people that provide the goods have no idea what it costs. These are the clinicians and the health systems. And the people that pay for everything are not in the room where any of this happens. And there's more. But even with just these three truisms, there is nothing like this industry ever in any other place in modern economy.

8:05The incentives are built completely skewed in order to accommodate this very funny model of how people consume health care. And the other piece of the puzzle is that the level of job security is almost perverse because we know that no matter what, healthcare will continue to exist. We will always need people break down. We will always need healthcare. There's a sense of you can't really hurt healthcare because it's like the Maslow thing. It's a necessity. So even though it's an industry that works on economics, it really doesn't. it will have to continue to exist no matter what the economics are.

8:45So that's the fourth crime that in a way colors the way healthcare operates. It is unique. It is unique. And what you described, complex in terms of whose interest lies where. Yeah, someone said who knew healthcare was so complicated. It's funny. When I first started our business, I used to go to the startups for the healthcare, their meetup events for motivation. Yeah. I would hear them, sorrow and their woes and selling into healthcare space. I thought selling into finances is so bad. I want to go back to, because I obviously want to get into the M &A side with the healthcare space. But before jumping into that, I'm curious about what led your business into acquisitions.

9:27What's spurred up doing those first acquisitions and what was the driver of the strategy behind it? Different companies in healthcare and health tech specifically will probably give you a different answer depending on what area they're in and everything else. But for us, it became very apparent that what we do, which is probably different than what people think we do, what we do is not video conferencing. What we do is logistics. We're a logistical infrastructure company that brokers the interaction between the people that provide services and the people that need the services under a variety of different circumstances.

10:02In a way, not dramatically different than what Amazon has done with goods for retail. We broker the distribution of live healthcare. What that means is we need to be pretty good with all three domains that participate. We need to be good, obviously, with patients, consumers. They need to be able to use us for all of those kind of things. We need to speak provider language really well because they're the ones supplying the goods, whether they're our providers or affiliated providers or health systems or whichever one it is. And we need to play nice by the rules, which means we need to work very closely with pairs.

10:40We need to really understand their language on coverage and eligibility and all those fun words that describe how the insights of healthcare works. It's really hard. A lot of companies are getting really good at one of the three. They have products for hospitals, or they have a product for pairs, or they have a product that is consumer-oriented, whatever, fitness or anything like that. for us to succeed, we needed to speak all three languages and we needed to tie them together. We need to create essentially a switchboard that allows all of these things to somehow work nicely together. I can tell you without blinking that it's a Herculean effort to learn one.

11:20It's borderline almost suicidal to try to work with three. During the different acquisitions that we've done over the years, yes, we have acquired companies that create either technology or services, but what led those acquisitions is will we be in a position to tell a better story to a domain that we need to participate in our vision than if we tried to do it on our own? Are we going to be closer to pairs in our ability to deliver their benefit structures if we buy SilverCloud? Are we going to be closer to health systems and how they operate services within hospitals if we buy Avisia? Are we going to be in better position to work with consumers in their own reality if we buy Conversa, et cetera, et cetera?

12:15Or are we going to have more behavioral health availability to the market if we buy a line? These are the kinds of things that drove us. It's really more about being in a better position to learn a language of a domain that we needed to play. When you look at the strategy of each of these deals, how much of this strategy was really defined at the company level that you could then peg these opportunities? I feel like it just varies. I'm trying to get a sense of how crystallized you have it where clear as day that this company is going to fit in as an acquisition to our company strategy? Or is there some shaping to make that company and you shift the strategy?

12:58We're actually very lucky. One of the things that are very different about Amwell has been that from the very beginning, we were not venture capital banked. From the very beginning of the days of Amwell, the two other companies, my brother and I did well. So we had investors saying, let's fund whatever you're going to do next, including some large institutional investors. So the way we carried ourselves as well, and specifically when we talk about our M &A strategy, was not influenced by let's just have inorganic financial growth, which is the thing that confuses a lot of M &A strategy. Is this accretive to our bottom line?

13:38Is it helping our EBITDA and all of that? It's not that we weren't aware of those things, but it wasn't the driving factor for our M &A. And we were in a position to actually ask ourselves, even if financially this looks great, what else does it do for us? And maybe I would even go a step further and say the privilege of saying, we really want to acquire this company because it allows us to tell a different story. And then if we think that they're a great company to do that, let's make sure the financials are creative. The other way around. You're calling out the elephant in the room on this one because that happens more times than not where M &A is the strategy of itself because we're trying to fuel growth and use that as the driver.

14:25Don't get me wrong. I'm not suggesting that the financial rationale for acquiring company is not incredibly important and you need to do your diligence and you need to be very comfortable that it's going to truly be a creative when it's all said and done and those efficiencies that you get all of the whole way more about this than anybody. But we were comfortable walking into those because we led those acquisitions by having essentially a framework of how that company is going to advance the current business of Amwell without that company. How will our existing promise to the market and our positioning and our differentiation in the market, how will that dramatically improve because those competencies or those capabilities or those assets are going to be part of Amwell.

15:16And then the money. And then make sure that, of course, it helps us financially. It doesn't become a drag on our budget or our operations or whatever it is. But when you're not stressed for the cash or whatever it is, you also tend to have a little bit more time to do the diligence in a proper way. You have the ability to confirm the extent that you can. that coveted piece, what we talked about earlier, that company is really good at a domain that we are not that good at. Everybody will tell you that they are, but you got to do better than that, right? You have to actually understand why are they good at this?

15:52What do they think is their secret sauce for being successful inside hospitals or inside pair markets or whatever it is? You need to check that, not only listen to them, but also listen to their customers who happen in most cases to be our customers as well. So you have the opportunity to check all of these different boxes, then you make the finances work and then you move forward. Yeah, it's interesting how you put that consideration in their view, how they see their place in the market and then ultimately how it's going to come together and what that combined story, which evolves. You've done how many acquisitions so far?

16:27Five, I think. Okay, Google told me four. So, which is typically what Google tells you. Google told you from the time that we became partners with Google, there were acquisitions that preceded that. Since then, there were acquisitions. You ready for case study time? Can we tell a story on the first acquisition you did and maybe tie in some of the strategy talk that we've had and how that may have shaped it? Sure. What were the lessons learned? I think the first large acquisition that we did was the acquisition of Avisia. When you say first large one, was there little ones that you just don't count?

17:03Because I'm curious about this, because even as a growing company, when you start thinking about what's the first acquisition going to be? Prior to that, we acquired a company called Aligned, who was much more of a straightforward acquisition because it's essentially a company that brokered psychiatric services to hospitals. They ran a group of psychiatrists. They have a network of psychiatrists, and we essentially bought the company and the network. So it's really more of a supply story that is now in this day and age, no question, we have a behavioral health meltdown. It's hard to find any kind of behavioral health providers.

17:37That was a good acquisition that we did at the time to make sure that our medical group has a very strong behavioral health network in it. And that was that acquisition. But it was more of the reason why I'm starting with Avisia is because the line was a straightforward purchase of supply. Yep. Avisia was a purchase of a technology company. This can be a very long story, so I'll try to make it short. What made them different, the reason why we acquired them was because we were, at the time, we were very much a payer-oriented company. This was the days of urgent care, telehealth. All the health plans out there wanted to offer telehealth-based urgent care because they thought, rightfully so in hindsight, that if they allow their membership to see a doctor online, that membership is less likely to go to the emergency room and stick them with a much, much bigger bill to pay the health plan.

18:36100 % now validated with data, but that was the drive. So for many years, most of our business was with the well points of the world and the Uniteds of the world and many of the Blue Cross Blue Shield of the world offering urgent care. We realized at that point that in order to really move the needle on healthcare, urgent care really isn't the story. We knew now that clinicians and patients can safely and intelligently deliver care to one another over technology, you had to begin to weave that into where most of non-urgent care health happens, which is the rest of healthcare, hospitals, group practices, PCP offices, and everything else.

19:20So we said, we need to get onto the provider side of things. Getting onto the provider side of things is hard. I can tell you, I'm trying to be politically correct here. I used to be a physician at one point in my time. We're a tough bunch. We are really a tough bunch. We're highly critical. We don't want to change. We don't want to do all of those kind of things for the right reasons. We try to be very conservative with the liberties we take with patients. The notion that you can care for a patient without actually putting a stethoscope on their chest is foreign to a lot of, or used to be anyway, foreign.

19:54And we said, yes, part of our success in the future is that we need to talk clinician language. We need to talk physician language. At the time, the only way that technology was utilized inside health systems in the provider side of things was something called telestroke, which is the case where you have neurologists are very hard to find. You have a lot of smaller hospitals that have a lot of patients coming in with stroke. They don't have a neurologist on staff, so they needed to use technology to have a neurologist oversight the care of that stroke patient from far away. And that was a big novelty, and it really saved a lot of people's lives.

20:32But that was the point of entry for the first time where technology was used to render care in a provider environment. That was the business of a vizier. They were building those carts that were primarily used for telestroke, but they found a way in. They were inside the provider environment, allowing clinicians to use technology to deliver care to patients. The decision to acquire them was not only because they were good and people like their services and everything else, but because they knew how to speak technology to clinicians. That comes with a whole bag of capabilities. It's not only to speak to clinicians.

21:09You have to speak to their electronic health record systems. You have to speak to their scheduling systems. You have to speak to the nurses who are facilitating the interaction with the clinicians and so on. That was the whole package. When we were determined that we were going to enter the health system world, that became the reason for that acquisition. And then the money worked and the finances worked. How many employees did your company have and how many did Avizia have? Oh, I think we were, I have to fact check this or put a disclaimer. I don't know. This was a long time ago. I think we were probably somewhere around the 500 employee mark or 600, and they were probably 150, 180.

21:53Okay. So pretty good size. On this acquisition, you're buying this company, and it's unique because the way you describe it, it's like they're in different use case, essentially serving a different market, but bringing you capabilities, expand in how you're delivering your current services to get into this other area. Is it, you look at it as, hey, we're bringing this company in as this different business line? Or is this getting, what was the thinking in terms of how is this business going to be combined together? And what's that going to look like going back to the story to the market? When you look at it from the financial perspective, you obviously have to model it such that if we did no integration, We didn't tie the two together and everything else.

22:35And they continue to run as two ongoing concerns that they will be OK. It's not a company that is in decline or is going to hit its nose on the curb in a minute. And we did verify that they had a good business. They have a good business or that part in AML today is a very good business. But the thinking was there is a lot of analogies, right? The similarity, if you think about American Well, before we can end well at the time, the urgent care brokering that we did for the pairs allowed two points to facilitate, to broker an interaction where care was actually delivered, a record was created, claim was submitted, payment was done.

23:15what Avisia was doing is they had two points that brokered an interaction where there was a patient on one side in a bed and there was a provider on the other side and there was an interaction, a record was created, care was delivered, claim was submitted, payment was made. It all sounds like the same business, radically different environments. The understanding was that we are going to acquire the company, we're going to respect the company's operation, we're going to let it continue operating to its magic and gradually begin to take those similarities and put them together. Because from that lens, we're almost identical.

23:55So we're like two planes running in parallel. I don't think the analogy is going to work where you actually become one plane, but you're running into the same destination, not the same destination. But it really worked out extremely well. And probably the proof in the pudding is there's a couple of them. But to me, it's the fact that most of the vast majority of the customers of that company are AMO customers today, all these years after. So we must have done something right. To me, the part that is even more profound is the fact that most of the leadership of that organization found a home in AMO.

24:29Even though they did well and all of that kind of stuff, they're still with us all these years later because they still find the mission to be the same mission and the purpose and the culture to be compatible. So give me some advice on building a retention package to keep people around. It's interesting. There's not one prescription there. Clearly, if you put a billion dollar in a retention package, you're likely to keep the person unless they already have a billion dollars. Clearly not economical to do for every employee of the company. People have to be compensated. They're going to do whatever they did before.

25:01So there's no reason why the compensation should be harmed. But they're going to do more than they did before because now they have to do this kind of merger of purposes and goals and customers and cultures and everything else. So there has to be an upside to them by way of compensation and everything else. But I'll be the first one to say, I think if that's your strategy, I don't think it's going to work out very well, long term. The financial compensation works for a little while in the technology world. People always can jump ship and find another greener grass with a company that just got really well funded and wants a quick way into something.

25:39It has to include an alignment on purpose. It does matter. I know it sounds like in a cynical world of only money talks and everything else, if people don't feel that they found a home and that they can move the needle for an industry or for people they care about and they can be proud to come back home to their spouses or family and say, I have a much bigger impact today than I had before, then I don't think they're going to stay there. It's that simple. And yeah, there's always a little bit of examples on the left and right that are a little bit different. But I think the majority of people want to feel that they make a difference and you have to make it very clear and true that they're in a position to do that.

26:20I think you have a really good point. I always wonder about that in terms of the retention, but specifically you're referencing entrepreneurs and there's always the cliche, Hey, you got to start the next thing and next thing. But then you see times like your example, where they stick around and continue to be part of the platform and grow. I think you have a really good point. Like it's got to be aligned with that purpose. I don't know what else it could be. You wake up in the morning, you go to work or in this day and age, you sit in front of video, or whatever it is, if you are not excited about what's ahead of you today, your days are numbered in whatever it is that you do.

26:58It's just the way it is. Modern days, especially in the United States, there's so many options. You can always move to something else. You need to really be excited and you need to feel that your individual contribution is necessary to bring it to whatever it is that you're involved in. Is there some approach that you have when you work with these leaders to get them interested or excited? How do you get them considering to be part of that purpose? People who are, especially in a company that's going to get acquired, long before you have the conversation with them, they know that these conversations are going on.