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Mergers in the NHS: lessons learnt and recommendations (some sections were Davis’s work is used)

All of these sections are copied directly from the NHS Improvement document written by CASS on NHS Mergers


2.2. Best practice review
Outside the NHS it is well known that up to 60% of all mergers fail to deliver the planned benefits, with some authors quoting a failure rate as high as 90% (Clark and Mills, 2013; Bauer and Matzler, 2014). However, the odds of success for small to medium-sized enterprise acquisitions are higher on average (45%) when the target organisation is in the same industry segment, or a very similar one, and when it is smaller than its acquirer in terms of revenue (Bauer and Matzler, 2014).
This frequently happens in NHS acquisitions, so the chances of creating value may be higher than average (Clark and Mills, 2013). While many authors emphasise the importance of strategic similarity as a factor for enhancing value creation postmerger, complementary differences have also been found to be crucial (Dash et al, 2012). The hospital trusts in this study showed both of these elements to an extent, so could be considered to have a strategic fit.
The transaction rationale described by interviewees was largely consistent with the evidence, which states that healthcare mergers frequently aim to improve financial efficiency to secure the viability of services, improve clinical quality and increase staff recruitment and retention (Protopsaltis et al, 2003). This research stresses that the rationale for a merger needs to be based on a clear, objective appraisal of the financial and clinical benefits that the transaction would bring to the organisations or to the wider health economy (Dash et al, 2012).
mergers lessons learnt summary.

The literature states that the benefits sought from a merger should be clearly understood and used as a basis for integration planning (Venema, 2015; Davis, 2012). This connection between the aims of the merger and the integration process has been linked to merger success (Bauer and Matzler, 2014).
Moreover, in hospital mergers clarifying how the merger will improve clinical care is essential to ensure clinical staff and stakeholder engagement (Dash et al, 2012).


4.2. Best practice review
Due diligence is the process of understanding the target organisation and usually focuses on financial and legal factors (Davis, 2012; Kusserow, 2013). Good due diligence is a key success factor in mergers and acquisitions transactions since surprises after an acquisition can result in failure to deliver the projected benefits (Davis, 2012). In the US healthcare sector, 25% of intended mergers do not go through due to findings uncovered by the due diligence process (Kusserow, 2013). However, mergers still fail due to surprises uncovered once the target has been acquired (Davis, 2012).
The vast majority of research on due diligence is from the private sector and tends to focus on financial data, legal issues, operational assets, deal pricing, market factors, marketing prospects, sales and strategy issues. As with many other industries, interviewees reported that due diligence in the NHS is mainly based on financial and legal elements, and is carried out by external firms. In addition, regulators require that governance arrangements are reviewed as part of the due diligence process (Galpin and Herndon, 2000; Ryan, 2010).
Galpin and Herndon (2000) stress the importance of delivering due diligence at every stage of the deal process and ensuring that it also includes three nontraditional components based around the ability of the two organisations to:
 achieve the level of integration required for synergies
 overcome cultural differences
 manage human capital risks.
Furthermore, they suggest the due diligence process should be used to challenge the projections and assumptions behind the rationale of the acquisition and consider the viability of the integration process. Studies of healthcare mergers in the US find that a lack of due diligence on regulatory compliance can result in significant costs if the target organisation turns out to be non-compliant post transaction (Anon, 1995; Kusserow, 2013).
In the NHS, major compliance issues with billing and core regulations are unlikely because of the heavy involvement of regulatory bodies, such as the Care Quality Commission and NHS Improvement, in the process. However, other factors, such as medical equipment maintenance, fire safety, infection control and adherence to minimum staffing levels, should be considered in the due diligence process since they have been reported as a cause of increased costs in the transactions reviewed.

Some industries have tools and checklists to guide the due diligence process. We provide an indicative due diligence list in our transactions guidance (Monitor 2015).4 Although these checklists can help ensure all the key aspects of due diligence are covered, due diligence should be an iterative process. It requires a tailored approach, which also investigates issues that are vital to the organisation and the specific transaction (Galpin and Herndon 2014; Ilsley, 1998; Monitor, 2015; Protiviti, 2014). It is therefore important to understand the root cause of the financial and/or clinical failures which underlie the transaction rationale behind the acquisition of a failing NHS trust.
Research indicates that it is not advisable to rely on data provided by the target (Ilsley, 1998). The accuracy of financial information is not usually a problem in NHS transactions since the figures are audited by third parties and available to regulatory bodies. However, projections cannot be verified and there may be other issues uncovered by the acquiring trusts, which raise the cost of quality improvement or integration (Ilsley, 1998). The information will be limited by the management’s understanding of its own organisational issues, which may be unsatisfactory considering that the target is usually a failing hospital.
A growing body of literature stresses the importance of cultural factors in mergers and acquisitions and, therefore, the importance of cultural due diligence (Berry, 1983; Ilsley, 1998; Galpin and Herndon, 2000; Marks and Mirvis, 2011; Bauer and Matzler, 2014). There is a key role for human resources (HR) in the cultural due diligence and merger process. It should increase understanding and raise awareness of the issues that will require management both during the transaction itself and in the integration following (Galpin and Herndon, 2000). It therefore gives an idea of the effort that will be required to implement the required change (Galpin and Herndon, 2000).
There are several models of cultural management in the literature (Galpin and Herndon, 2000; Marks and Mirvis, 2011); they are reported in more detail in Section 11 ‘Culture’.


5.2. Best practice review
In the private sector there is evidence of a strong link between correctly pricing a deal and the success of mergers and acquisitions (Goedhart et al, 2010).
The literature indicates that, even in the private sector, integration budgets are underfunded by at least 5% (Miles et al, 2014). Understanding the potential for synergies and resourcing integration correctly is key to merger success (Davis, 2012).
Most interviewees in La Piana and Hayes’ 2005 work on mergers and acquisitions in the non-profit sector (2005) found that ‘transition funding’ was not sufficient. When not-for-profit mergers fail, they cannot resort to solutions used in the private sector, eg price hikes or selling the acquired organisation (fully or partly) to recover losses. These options are not available because NHS tariffs are not set by each trust and closing services involves multiple stakeholder approvals, which are often denied because patients would have reduced access to services for patients.
Therefore, acquisitions in the NHS carry an inherent financial risk for the acquirer and negotiating the correct funding to support the acquisition is vital. It is also unsurprising that some respondents would not recommend NHS acquisitions to others because they saw the funding risks as too high.

6.2. Integration planning: best practice review
The literature review found that integration planning should start early, during the due diligence process, to establish the best approach and identify the team that would take it to completion (Protiviti, 2014). One of the key reasons some integrations never happen is that the planning process was not resourced appropriately (Protiviti, 2014). Resources need to be put together for the planning before the integration process is determined (Davis, 2012).
The integration plan should clearly describe what decisions are required and what must be done and how on Day 1, in the first 100 days, the first year and beyond (Protiviti, 2014). A 100-day plan is usually the first to be created. This defines the integration plan at a high level, allowing early decision-making, and should include:
 development of a vision and strategy
 short- and long-term actions
 development of a cultural questionnaire and tool to measure culture gap and progress
 all project overviews, including initiatives for each function
 a cost–benefit case
 plans to ensure business as usual (Davis, 2012).

The plan should be developed and built on to include short- and long-term plans (Davis, 2012). It should be clear how the integration will support delivery of all the aims of the transaction, not just the cost savings (Protiviti, 2014). Best practice recommends using a benefits realisation methodology (Davis, 2012; Galpin and Herndon, 2014).
The literature stresses the importance of involving operational staff from the start in development of the integration (Davis, 2012). It has the advantage of making sure the plans are realistic and also helps to engage staff with the change, which increases the chances of successful delivery. Plans should be reviewed and validated by key employees for each function.
It also recommends a review of the ‘readiness to integrate’ for each function to understand when different parts should be integrated (Davis, 2012). This helps staff understand where limited resources are best directed, where there is already ongoing change and where further information is required to make decisions.
There is evidence that during integration, employees lose focus on their daily tasks, which leads to a drop in productivity (Davis, 2012). This is an inevitable consequence of the uncertainty that employees face at a personal and organisational level, and which often results in loss of morale and organisational performance (Davis, 2012). This fall in productivity can be partly mitigated through good ‘change management’ practices. Extra capacity should be factored into the integration plans to ensure that the organisation continues to meet its performance targets during this period (Davis, 2012; Galpin and Herndon, 2014).




6.4. The degree of integration: best practice review
The level of task and people integration depends on decisions relating to the level of integration for the acquired entity (see Figure 2), ie whether to treat it as a separate part of the organisation, absorb it fully, or aim for some level in between (Davis, 2012; Proft, 2014).

Choosing the correct level of integration is crucial: an unrealistic level may mean the transaction has the potential to waste a lot of money and disrupt services without delivering any benefits. Davis (2012) recommends making clear in the integration plans the extent to which each function or service will be integrated. Resources will be limited, so balancing the available budget with potential synergies is crucial.
Due consideration must also be given to interdependencies and how integration of certain functions (or lack of it) will affect others (Protiviti, 2014). An obvious example of the cross-functional co-ordination required is information technology (IT) system integration, which has an impact on the level of integration that can be achieved in operational services. In this study, delays in the integration of electronic clinical records in one trust were reported to have slowed down the pace of clinical integration.

12. Assess the readiness and ease of integrating each function and clinical specialty.
13. Factor the likely post-deal dip in productivity into the integration plans.
14. Include clinical staff in integration planning to keep plans realistic and engage staff with the change.
15. Develop comprehensive integration plans detailing the level of integration for each function and specialty, such as IT.
16. Use a benefits realisation methodology to deliver post-merger integration.
17. Make sure plans detail how non-financial benefits will be realised.



7.4. Best practice review
The research unanimously recommends that the integration is led by a single executive integration lead manager with the ability to take the necessary decisions. It should also be overseen by an integration committee, including senior executives, which monitors the achievement of synergies against the plan (Protiviti, 2014). A senior officer for each function and business unit involved in the acquisition should be part of this committee, supported by other key leaders as required. Committee members should provide a strategic steer and take key decisions around budgeting, dependencies, timing and priority in their respective areas (Galpin and Herndon, 2014).
The literature also recommends regular review of projects. Things change very quickly as new information about the target is uncovered so it is important to identify projects that are not working early and reallocate resources (Davis, 2012).

Protiviti (2014), Davis (2012) and Galpin and Herndon, (2000) recommend a team structure that includes:
 a central PMO
 multiple functional teams including: IT, HR, finance, sales, customer service and the operations and supply chain.
You could have sub-teams in each function if the workload requires them, although the authors recommend not having too many to avoid dilution. The literature recommends that a PMO should include some members of the due diligence team as well as programme and project managers. The functional teams, on the other hand, should be internal employees working with the PMO through a dedicated liaison person (Protiviti, 2014). While PMOs can be supplemented with external consultants, functional teams need to be internal, may require training and their posts should be backfilled (Davis, 2012; Protiviti, 2014).
Davis (2012) also recommends that external consultants who have integration experience but do not understand the organisation should work closely with internal staff. It is important to bring in expertise but care must be taken to avoid poor continuity and loss of momentum when their work is completed. The partnership model described for one of the trusts in Section 7.3 is a good example of how these recommendations can be implemented.
The models reported by trusts were very similar to those recommended in the literature, but there were not sufficient resources in some of the transactions.


18. Use internal staff where possible but bring in external mergers and acquisitions expertise if it is missing.
19. Ensure that some of the people who develop the integration plan also implement it.
20. Backfill internal staff delivering the integration plans to maintain business as usual during integration.



8.2. Best practice review
In a study by Miles et al (2014), synergy overestimation was the second most important cause of poor deal outcomes. They attributed this overestimation to a need to justify the acquisition price and a lack of understanding of the realistic level of synergies that can be expected. Their study shows that companies which overdelivered their synergies only did so because they had come to understand their synergy potential through benchmarking and due diligence, and deliberately used the merger to deliver cost benefits beyond economies of scale. These companies used mergers as opportunities to introduce methods such as zero-based budgeting and new ways of working to reduce costs.
McLetchie and West (2010) showed that organisations that over-performed on their synergies maintained flexibility, which enabled them to identify and capture additional value. Merging operations delivers a conservative amount of synergies while transformational activities can increase value creation by dealing with longstanding business constraints. Therefore this extra value is created by taking advantage of the ‘unfreezing’ of the organisation and focusing on a few key processes, functions or business units that have high transformative (financial) synergy potential. The findings in this study were very similar to those reported by EY (2013), in which executives reported that in hindsight they would have allocated a higher budget, increased integration resources and integrated faster.
The literature emphasises the need for speedy integration. Speed affects the financial targets through an early reduction in (recurrent) business costs through synergies (Angwin, 2004; Davis, 2012). It also shortens the period of uncertainty for employees resulting in reduced productivity losses and uses the momentum in the early days post deal more fully (Angwin, 2004; Bauer and Matzler, 2014; Galpin and Herndon, 2014).
Some consultancies even advocate delivering full integration within the first 100 days (Angwin, 2004; Davis, 2012; Bauer and Matzler, 2014; Galpin and Herndon, 2014). Others, like KPMG (2011), define ‘fast’ merger timelines as less than two years. Others still, consider seven months to be short and two years to be long. This inconsistency in the definition of fast and slow integration in the literature makes it difficult to make specific recommendations. Moreover, Bauer and Matzler (2014) warn that although it is common practice to recommend fast integration, there is no strong evidence to support this statement. It has also been postulated that a slower integration may reduce conflict, improve trust-building and reduce disruption of the business.
Some organisations integrate over two phases; with the second phase delivered after review of the first and benefiting from better knowledge of the acquired organisation. In reality, different functions integrate to different levels and at different speeds (Davis, 2012). A balance that suits the specific transaction and function must be found.
Bauer and Matzler (2014) recommend that the choice of speed of integration should not automatically default to ‘fast’ but be tailored to the transaction. Implementing change in public services is known to be complex and may also take longer because of the many stakeholders (Grant Thornton 2010).


8.4. Best practice review
Herndon (2014) reported that poor delivery of Day 1 activities is a strong indicator of mergers and acquisitions failure. A ‘safe landing’ on the first day suggests that the leadership team knows what it is doing and promotes employee confidence in its ability to take the organisation through the integration (Protiviti, 2014). As PwC (2013) points out, “you only get one chance to make a first impression”.
Day 1 initiatives are specific to each transaction but most organisations will deliver the key changes outlined below:
 Consistent communication of messages (including speeches by the chief executive) using appropriate branding for the new organisation and making time to answer employees’ questions. Davis (2012) recommends ensuring that employees hear the messages from the leadership team first, before other sources where possible.
 IT integration, which is also central to HR, finance, procurement and communications (email, intranet, etc). Best practice recommends making arrangements to ensure continuity of service, maintaining service volume and quality for customers (Davis, 2012).

21. Do not underestimate the difficulties of implementing change due to the human factors of change management.
22. Consider the distance between sites when deciding on the levels of integration among specialties at different sites.
23. Get a grip on the target as quickly as possible and maintain the momentum of integration, ensuring all necessary approvals have been obtained.
24. Consult and get in writing the agreement of stakeholders to integration plans. Do not make assumptions about the standardisation of care when other stakeholders’ approval is required for implementation.
25. Develop and implement a strong Day 1 plan to enhance staff confidence in the new leadership and cultural integration.




9.2. Best practice review
Potential benefits from healthcare mergers fit into four categories (see Figure 5). In the private sector, acquiring organisations derive financial benefits from both revenue and cost synergies (Davis, 2012; Galpin and Herndon, 2014). In the not-for-profit sector, however, organisations have less access to revenue synergies and therefore may be less likely to deliver financial benefits (La Piana and Hayes, 2005). In the NHS, hospitals do not have control over prices so revenue synergies can only be driven by volume through, for example, an increase in referrals or bed occupancy rates. Margins can only be manipulated by decreasing costs. This makes accurate projection of cost synergies crucial as financial benefits from the deals hinge on them.
Clinical benefits are also often stated as key drivers for hospital mergers but there is no definite evidence that mergers alone necessarily deliver clinical benefits (The King’s Fund, 2014). Some argue that they cause a deterioration in clinical quality (Ho and Hamilton, 2000). Outcomes for not-for-profit mergers may need to be considered in comparison to the projected outcomes without the merger, rather than focusing just on improvement (La Piana and Hayes, 2005). In some cases the desired benefit is to avoid further deterioration.
Evidence from healthcare mergers in the US and UK finds that most mergers have not delivered the planned benefits (Cereste et al, 2003). The recent Dalton Review recommends considering alternatives to hospital mergers to deliver the desired benefits like joint ventures and management contracts (Dalton, 2014).

The question is whether it is worth putting NHS organisations through the pain of a merger when other options may be just as successful (Cereste et al, 2003). At present, the literature is unable to provide the answers (Ho and Hamilton, 2000; Cereste et al, 2003; Protopsaltis et al, 2003; The King’s Fund, 2014).

26. Be realistic (conservative) when planning synergies, particularly clinical synergies.
27. Create dedicated teams focused on realising all benefits and rigorously performance manage these teams.
28. Understand and include the cost of aligning pay and staffing levels across the two organisations in the transaction costs.
29. Negotiate a realistic performance holiday of at least 12 months from both regulators and commissioners.


10.4. Management restructuring: best practice review
Best practice recommends that when restructuring following a merger, organisations should understand which key employees they need to retain (Davis, 2012; Galpin and Herndon, 2014) while Walsh (1988) warns that a high turnover of management in the target organisation is to be expected after an acquisition.
Moeller and Brady (2014) found that companies that were able to retain a higher percentage (63% vs 46%) of key employees from the acquired organisation improved their merger success rates. Galpin and Herndon (2014) recommend putting in place succession plans for key senior manager roles when restructuring following a merger.
When an organisation is going through restructuring, employees can be deeply affected on a personal level. Managers are often not skilled enough to manage the behavioural aspects and this can leave both managers and other employees feeling disengaged (Doerge and Hagenow, 1995).
The Chartered Institute of Personnel and Development (CIPD) provides the following advice on how to manage the inevitable human aspects of restructuring (Wood, 2008). See Figure 6 below.
Another key aspect that has been linked to mergers and acquisitions failure is a mismatch in compensation and benefits between the two organisations. It is often missed at the planning phase and may result in a significant increase in merger costs. Discrepancies in pay and staffing levels are common and should be understood at the due diligence phase to inform pricing (or transaction funding in the NHS).


10.6. Organisational structure: best practice review
Following a merger, a key challenge is to design a suitable management structure for the new organisation. The organisational structure may be functional, product or geography based. In acquisitions the chosen structure will depend on:
 the structure and processes of the acquired organisation
 the degree of integration desired
 the relative size of the acquired organisation.
 the number of external stakeholders and relationships
 the level of autonomy devolved to management (this will both influence and be influenced by the organisational structure) (Lega and DePietro, 2005; Connor et al 2012; Davis, 2012).
All NHS foundation trusts show a function-based organisational structure centred on discipline-based specialties or directorates like, for example, surgical and medical directorates (Lega and DePietro, 2005; Connor et al, 2012; NHS Trust Directory, 2015). This structure predominates in hospitals in industrialised countries; it works best when business units are self-contained and autonomous but may result in ‘silo’ working (Connor et al, 2012).
The choice of management structure varies on a continuum from site-based to centralised cross-site management but the correct balance will be different for each organisation. While the literature shows that there is a link between decentralised decision-making (autonomous managers) and clinical quality, the research relating to organisational structure is limited (West, 2001; McKinsey, 2010; Department of Health, 2014; Kinston, 1983; McKinsey & Co 2011).

30. Tap into the mergers and acquisitions experience brought by non-executive board members.
31. Seek peer support from executives in other NHS trusts who have recent mergers and acquisitions experience.
32. Ensure that the integration team and operational integration leads are adequately resourced to deliver integration, while also ensuring a strong continuing focus on business as usual.
33. Consider distance between sites when planning the new organisational structure:
o if there is not an easy commute (up to one hour between sites), consider site-based operational management, devolving powers to site managing directors. In this model, codify information to maximise clinical synergies
o if there is an easy commute, consider creating a more cross-site organisational structure, joining up services along clinical specialties.