Executing M&A in Healthcare

From a medical background to M&A

First of all, I don't think that it's attributed to our bright thinking when we started the telehealth company 15 years ago. I mean, 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. Paradoxically, having that amount of time ended up being very necessary when you want to do anything disruptive in health care, because 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 health care. 

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 and health care as well. 

So 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 organizations, but also legislators, medical boards, and others to really understand what's the right way to build it. And 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 of our existence.

What makes the healthcare space distinct

Regulatory effort is driven by two things. One is patient safety. The quality of the care, of the access to care, regulatory effort 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 we'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 slips into commercial very quickly.

So the rules of right and wrong, 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 pair 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. So yes, regulatory is a very big part of it. 

There's nothing like the healthcare space. If you think about it, it's one of the only markets or industries, 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 the modern economy. The incentives are built completely skewed in order to accommodate this very funny model of how people consume healthcare.

And the other piece of the puzzle is that the level of job security is almost perverse because we know that no matter what, health care will continue to exist. We will always need people to break down, we will always need health care. So there is a sense of job security, or 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 will have to continue to exist no matter what the economics are. So that is kind of the fourth other crime that in a way, colors the way healthcare operates.

What drove Amwell to do acquisitions

In different companies, in healthcare and health tech specifically, we'll 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 from what people think 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. In a way, not dramatically different from what Amazon has done with goods for retail. 

We broker the distribution of live healthcare. What that means is that 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 kinds of things. We need to speak provider language really well because they're the ones supplying the goods, whether there are 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. We need to really understand their language on coverage and eligibility and all those fun words that describe how the inside of healthcare works, and 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 or 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. And I can tell you without blinking that it's a Herculean effort to learn one. It'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 try 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 Silver Cloud? 
• Are we going to be closer to health systems and how they operate services within hospitals if we buy Avizia? 
• Are we going to be in a better position to work with consumers in their own reality if we buy Conversa? Et cetera. 
• Or are we going to have more behavioral health availability to the market if we buy Aligned? 

So 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 need to play. 

Shaping the acquisition strategy

One of the things that are very different about Amwell has been that from the very beginning, we were not venture capital-backed. 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 and 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 just have inorganic financial growth,” which is the thing that confuses a lot of MNA strategies. Like, is this accretive to our bottom line? Is 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 accretive, the other way around.

And by the way, don't get me wrong. I'm not suggesting that the financial rationale for acquiring a 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 accretive when it's all said and done. 

And there are 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 essentially having 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 AMWEL. And 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.

And 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 to the extent that you can, that that coveted piece and that company is really good at the domain that we are not that good at.

Everybody will tell you that they are, you got to do better than that. You have to actually understand why they are good at this? What 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 happened 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.

Amwell’s first acquisition

The first large acquisition we did was the acquisition of Avizia. Prior to that, we acquired a company called Aligned, which 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.

That 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 Avizia is because the line was a straight forward purchase of supply.

Avizia 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 at the time we were very much a payer-oriented company. These were 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 allowed their membership to see a doctor online, that membership is less likely to go to the emergency room and stick them with a much bigger bill, the payer, the health plan. 100% now validated with data, but that was the drive.

So for many years, most of our business was with the Wellpoints 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 know 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 happens, which is the rest of healthcare hospitals, group practices, PCP offices and everything else. So 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 clinician, a physician, at one point in my time. 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 kinds 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 or used to be anyway foreign. And 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 on the provider side of things was something called telestroke, which is the case where 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, to care for that stroke patient from far away. And that was a big novelty, and it really saved a lot of people's lives. But that was the point of entry for the first time where technology was used to render care in a provider environment. 

That was, with some other peripherals, but that was the business of Avizia. 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. So the decision to acquire them was not only because they were good and people liked their services and everything else, but because they knew how to speak technology to clinicians.

And that comes with a whole bag of capabilities. It's not only to speak to clinicians. You 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 were facilitating the interaction with the clinicians and so on. But that was the whole package. 

And 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.

Integrating the new company

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, they continue to run as two operating, ongoing concerns that they will be okay. That 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 of Amwell today is a very good business. But the thinking was there are a lot of analogies. The similarity, if you think about American Well, before we became Amwell at the time, the urgent care brokering that we did for the payers allowed two points to facilitate broker and interaction where care was actually delivered. 

The record was created. Claim was submitted. Payment was done. What Avizia 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 almost sounds like the same business. Radically different environments. So 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. 

So 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, 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 animal customers today, all these years after.

So we must have done something right, and to me, the part that is even more profound is the fact that most of the leadership of that organization found a home in Amwell. Even 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 that, to me, is a stronger sentiment.

Retaining key people

There's not one prescription there. Clearly, if you put a billion dollars 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.

If anything, people have to be compensated. They're going to do whatever they did before, so 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, 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 can always jump ship and find another greener grass with a company that just got really well funded and wants a quick way into something.

It has to include an alignment on purpose. It does matter. I know it sounds like 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, very clear and true that they're in a position to do that.

You wake up in the morning. You go to work, or in this day and age, you sit in front of a video, whatever it is. And if you are not excited about what's ahead of you today, I think your days are numbered.

In whatever it is that you do, it's just the way it is. In 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.

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. They already have developed on their own a mental model of what will be great or I'm walking scenarios. 

They know long before you know who they are and what they do. It's a different company. You haven't spoken to everybody and so on. You don't know all the better things and worst things about the company that you only know once you get together and become married and everything. But they do, and it's fascinating. I think that it doesn't always work, but if there's a way to allow them in some way to realize what they are excited about. You have a much higher probability of not only retaining them, but actually getting them excited, motivated, and delivered, but you have to listen to their ideas.

First acquisition lessons learned

Trust your instincts. It's a lesson that you learn again and again in life. Not always, but in many cases, your first impression is something that you need to take in very seriously. 

You're always going to find things after the acquisition. That's just the way life is. Like when people go on a date, they dress up, they put makeup on for a reason, you look your best. And 10 years later, you love each other, but it's not exactly like you dress up for a date, and that's okay.

You walk into it with the understanding that there is going to be a bell curve. Most of everything is going to be hopefully, as you know it, some of it very little of it is going to be much better than you expected. And some of it is going to be much worse than you expected, the tails of the bell curve.

The part that you’ll learn is that sometimes you have an advanced clue to that edge of the bell curve. You know there's something not going well there, and you want to believe, and you want to feel that everything is good, and you want to focus on the main part of the belly, as you should, but you disregard it.

And more often than not, that's a mistake. If you feel that you stumbled over something that doesn't make sense to you, figure out until it makes sense to you. Don't say, “Oh, I just don't understand. I'll understand later. It's fine. That's okay.” 

And by the way, I just want to be honest about it. I think that other people that will be on your show will say that actually, sticking to those things that you stumble upon to try and understand them may actually be a very bad business strategy because while you may be right, you may be completely souring the atmosphere of the acquisition by honing in on things that are bad or wrong, which are inevitable, and you're just going to derail the dynamics.

So there's a balance to this. But I think, as I grow old, I keep telling myself, when you have a hunch that something is wrong, you need to give it two more cycles than you think it's going to be okay.

Dealing with transaction surprises

I’ve seen surprises in technology. I'll give you one example. Often enough, when you look at a technology company for the purpose of acquisition or whatever it is, they show you end products and if they're good at this, they show you a customer implementation of the product and the customer is very happy about it. 

And if you really want to do the deal, you can say that's great and you will never be fired because you kind of did the diligence. You look at the product, you look at the implementation, you look at the customer and the customer is happy, so it's okay. 

But what’s really hard to find is what was the non-conventional effort that needed to go into deploying successfully that customer? And what is the reproducibility of that effort to 20 other customers of the future? Because if that company literally failed itself, day and night, seven days a week in a non-economic, no economical sense of the world, in order to make sure that that works really well. They may have been successful, but it may be impossible to replicate. 

So unless you actually spend the time in the fireside chat to hear the war stories of that implementation, you won't even have any understanding on whether this can be done again. And it's almost, I would say it happens more often than not because younger companies, that's what any CEO of a young company will tell you. Know that those first implementations of their product are, you know, life or death. So they will go out of their way in an incredible way to make them successful.

But the expense of resources associated with going out of the way is a very big part of the financial formula. If that's what it takes to implement every time, that's a terrible acquisition. So I don't think that, you know, this example of the other example, but this happens all the time, especially when you acquire younger companies.

And you have to do that smartly because you pick apart people that you want to be partners with forever and ever. So you have to be very smart about the way you do it.

Approaching deals as one of the main principal

The first deal that you do, you make mistakes. Hopefully you're in a position to have really good advisors. Usually, if you're sufficiently large and you have bankers to work with you and you have legal teams that work with you who have done acquisitions in healthcare technology and understand all of those kind of elements and understand risk stratification, maybe their systems are not secure and they have heap of violations that are waiting to be discovered.

And there's a whole bunch of things that you don't even think about that become your liability the moment that you acquire. But you have to delegate. To do diligence in the time that you have available to close the deal is hard.

It has to be divided into teams. So you have a technology team and a risk or IT team and a clinical team and DISC team and the finance team and all that kind of stuff. It's almost like second nature to say, I want to spend as much time with the leadership of the company that you're acquiring because chemistry is so important, which it is. And alignment is so important than everything else. 

And it almost gets to the point that you're spending so much time focused on the other company that you have less time to listen to your people who are coming back and they have their gut instincts. The amount of time that you spend debriefing with your own team to really understand not only what they have found that is written, but what their gut tells them, is almost always underinvested.

You learn a lot from unspoken, unwritten diligence. And it has to be a culture of communication internally inside your team that you're not just answering the questions of diligence and getting the data, but you're also forming an opinion at every level. 

You have to be able to explain your opinion and your gut feeling, and you have to suggest if you have a gut feeling about something that isn't right. The best person to tell you how you actually find out is the person that had that gut feeling. So you have to listen to them for another cycle in order to do that.

So maybe this sounds a little bit amorphous. But to me, you really have three cycles of diligence. You have direct diligence with the leadership and the organization that you're trying to acquire. You have the second diligence, which is the readout of all of the things that came out from the diligence, all of the answers to the questions and everything else.

And then you have a third cycle, which is the, what's your gut feeling about this? Is there something else here that we don't know? Is there something else here that we need to know that we haven't asked about, that was not in the questions that we want to have answered? That's the third cycle, and it's really important to follow all the way to the third cycle to get it right. You have to amplify the gut feel.

We've done McKinsey, we've done Accenture, we've done this, we've done that, we’ve done those cycles around. But I think they can help us tremendously in terms of just creating the discipline and the structure and all that stuff. They come equipped with a lot of artifacts that are really helpful and smart people as well, but you are, almost by definition, much closer to your business, your strategy.

If you took the pod that you get from McKinsey to six months training before they can help you do the acquisition, then maybe yes, but otherwise, they can help you orchestrate the deal really well. You still need to be the one asking the questions.

Deal sourcing

We did proprietary deals. One of them was actually closed already to a bank in that sense, but for the most part, this was not bank solicitation. These were people that we knew and approached.

Because the determining factor on whether we're going to pursue an M&A is whether we think that we can tell a better story on how to accomplish our vision and our mission with them, and then make sure that the finances work and that there's no conflicts and there's no risk and liabilities and so on. I think because of that, for the most part, we're looking for things that are very specific.

We’re searching for this. We get a lot of options, a lot of opportunities from various bankers out there, and many of them are very interesting, but it's not the process. It's like, could we use this rather than we're looking for that?

And the code we use is to me, in murky waters. You can always use this A-list to some degree, but I don't think that that should dictate your M&A strategy. You should have a purpose.

Managing relationships with the counterparty

It's actually very easy if you respect that other company to be the one doing magic that you can't, because that's why you bought them. Well, that's why you acquired them or entered into a deal with them. If you were able to do this, then you don't need them and you don't need to acquire them.

You are doing this because they bring to the table something that you either couldn't do and can't afford to learn. Don't have enough time to learn, whatever reason they bring that. And for as long as the entire interaction with their leadership team is driven by the fact that they represent a genius that you don't have, then it flows. Because they feel not only appreciated, but they feel proud that they feel a sense of responsibility because they are going to be expected to do that magic that only they can do. 

So on day two after the acquisition, they have that. They still carry that responsibility, which I think in many M&As that gets blurred. People say, “Oh, we get sucked into the bigger company and now you just round in movement.” It's everybody's responsibility, not only ours. And then people disappear because they lose purpose and they lose individuality and all of that. 

If that company that you join forces with is still trusted on its own to carry their magic, then I think you have a stronger footing for the future together.

Communication during diligence

To the extent that you can, almost without exception, companies that are in the process of being acquired are going to be very, very guarded and very protected about talking to everybody around. There's not going to be an open door for a lot of good reasons. 

First of all, they want you to see a certain view of them and their executives are going to be very in sync in doing that the moment you get to everybody on the floor. It's very hard to think of the message, and that's okay. That's like going on a date. You want to make sure it's good looking and consistent. 

I think the other piece of it is also that a young company needs to protect its employees' psyche. If the acquisition hasn't been sealed and done, and usually you need the DOJ to approve. It's a long process. 

If you walk around and start talking to employees, you're creating just by your interaction, a set of expectations that may or may not happen. And if the acquisition doesn't happen it will potentially demoralize that company's employee pool and create a lot of trouble, and it's unfair to them.

So, for a lot of reasons, I think that a company that's being acquired needs to be very thoughtful about the balance of the exposure of the acquiring executives to their employees. Once the acquisition is done, it's in everybody's interest to spend as much time together and open the kimono and be very honest about it and everything else because you're family now.

Like it or not, you’re family so it's in everybody's interest to be as transparent. Whatever laundry you didn't do together before you got to do now.

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