Signs Point to High Volume of M&A Activity to Finish the Year

At the halfway point of 2021, signs point to a second straight year of record-setting merger and acquisition activity in the behavioral healthcare sector, according to a quarterly report published last week by M&A advisory firm Mertz Taggart.

Through the first six months of the year, 57 transactions have been announced, putting 2021 on pace to top last year’s record 107 deals. Private equity remains a driving force, accounting for 20 of the 26 deals completed in the quarter ending June 30. Deals for addiction treatment and mental health programs were relatively in line with activity observed in the first quarter of the year, however, interest in autism and intellectual/developmental disabilities service providers waned, with just 6 deals completed vs. 11 in the opening quarter of the year.

>> READ the Mertz Taggart Q2 M&A Activity Report

“Many private equity groups that have a platform company have decided to go the de novo route rather than to acquire a small provider for what have been high multiples,” Mertz Taggart managing partner Kevin Taggart said in the report. “They can do it more cost effectively and have a waiting list shortly after they open.”

As for the back half of 2021, Taggart said he expects deals to keep flowing.

“We expect transaction volume will likely accelerate over the second half of the year as sellers, burned out from the pandemic, are looking to get something closed in 2021 due to the anticipated increase in the capital gains tax rate,” he said.

Taggart’s mention of a potential capital gains tax rate increase is in reference to a proposal by the Biden-Harris administration that would increase the tax rate on long-term capital gains from 23.8% (including the 3.8% Medicare tax) to 43.4%. The Mertz Taggart report notes that a $10 million transaction that nets $7.62 million of after-tax proceeds under the current rate structure would require $13.46 million in cash proceeds to net the same amount after taxes under the new proposed rate.

If approved, the new rate is expected to go into effect on Jan. 1, 2022.

The biggest obstacle to a high volume of transactions in the next 6 months could be finding room on the calendars of M&A advisors, including attorneys, accountants and clinical professionals, Taggart said.

“Many won’t have the bandwidth to handle the volume for those that aren’t already progressing down the path,” Taggart said. “We’ve talked to a number of accounting firms, buyers and legal firms that are concerned they won’t be able to handle the demand for those that aren’t already engaged in the process.”