The most important decision a board can make is whether to change control of its health care organization. Deciding to pursue a merger, sale, acquisition, joint venture or lease is even more significant than selecting a CEO. A board can hire and fire its chief executive; however, once it gives up organizational control in a merger, sale or joint venture, it is extremely difficult to reverse the decision. In the case of mergerlike transactions, undoing such decisions—assuming it were even possible—will cost considerable time and money.

The board is at the center of the merger or partnership process. First, the decision to change ownership status is a board—not management—decision. Second, trustees bring varied experiences to the boardroom, and many have been in industries that have undergone dramatic change. They can provide valuable guidance and perspective on weathering challenging times. Finally, trustees are more likely to be objective about the hospital or health system's ability to remain relevant to its community in its current strategic form, with its resultant operational and financial performance.

Before the institution can begin the search for a partner, the board has several tasks to complete. Trustees who do their homework up front are the most helpful to their management team, organization and community and create the best chance for success. Following are trustees' "must-dos" in today's challenging, competitive environment.

Why Give Up Control?

Most organizations decide to merge or form partnerships around one or more of the following reasons:

  • Finances: The organization has too much debt and needs money, especially capital.
  • Growth: The organization wants access to new markets or needs primary care and specialty physicians.
  • Mission: The organization wants to protect and foster faith-based health care services or protect nonprofit community-based care.
  • Defense: The organization is in a consolidating market and doesn't want to be the last one standing.
  • Potential bankruptcy or closure: The organization missed or rejected earlier partnership opportunities and has little leverage to achieve a true merger.

What are the specific reasons your hospital or health system would consider a dramatic change in its strategic direction? Until every trustee can articulate the answer to this question, no board should authorize its CEO to commence discussions with another organization. Why? Because eventually the board will need to sell its reasoning to the community and other stakeholders, and it is difficult to sell something you do not believe or clearly understand.

Next, trustees should understand what their organization brings to the deal table. What advantages or distinction does your hospital or health system have and, conversely, what concerns might another party have about your organization? What might another party consider impediments, such as a high debt level or a difficult cultural fit? This is important background in understanding the objectives an organization should seek in a mergerlike transaction.

Objectives and Criteria

Once your board understands why it is considering a change of control, it must determine what the organization hopes to achieve from a transaction and whether its objectives are realistic. For example, if your organization is looking for cash and capital, yet wants autonomy, that is not realistic. Even a bank would not do that. On the other hand, if another institution has the financial resources to invest in needed services and facilities for your organization, the board is carrying out its fiduciary duty by preserving health care services and fostering financial stability through a merger or partnership.

Your organization's proposed transaction objectives should be specific and realistic enough that absent another organization's meeting these objectives, your hospital or health system would walk away from the deal. In articulating merger or partnership objectives, focus on what is truly needed from the transaction rather than a wish list of many items, some of which may not be realistic and perhaps will put off potential partner organizations.

What are you looking for in a partner? This question assumes that the organization has its choice of partners. Some hospitals and health systems have waited too long to seek a strategic partner and may have only one option. Don't let your organization end up in this position. Many solo hospitals and even small or modest-sized systems are, or should be, evaluating their strategic strength and direction. Trustees can provide valuable input to management in developing the criteria to judge which organizations might meet your strategic objectives. These criteria could address:

  • Nonprofit vs. for-profit alternatives
  • Faith-based vs. secular options
  • Geographic preferences
  • Depth and breadth of services and locations
  • Size
  • Culture fit
  • Reputation
  • Clinical distinction and quality of care achievements
  • Financial staying power

Once the board authorizes merger or partnership discussions, trustees' responsibilities shift from internal deliberation to external execution. They are:

  1. Appoint a board-level task force.
    Once authorized by the board, the next step is for the board to appoint a task force to work with the CEO and management team in seeking potential organizations that fit their objectives and criteria. Be sure trustees appointed to this task force are respected for their institutional and community integrity, and are able to handle the confidences and responsibilities that such appointments require.
  2. Develop a communication plan.
    A communication plan should be developed that addresses when or if the organization should announce its strategic pursuit of a partner, what will be said, and who has been chosen as the authorized spokesperson for the organization. Physicians, employees, community leaders and others will be nervous about such discussions and subsequent strategic evaluations, so preparing the communication plan up front, before emotion sets in, is a key consideration for management and the board of trustees.
  3. Seek experienced, credible outside help.
    Discussions with other organizations should proceed under a signed confidentiality agreement. Evaluating transactions is costly, so do it right the first time. Because organizations will continue to be competitors until a deal is closed, the parties are precluded from exchanging non-public information, including strategic, pricing and market information.
    Don't take shortcuts in getting the help of experienced lawyers and consultants at key points in the process. Shortcuts usually lead to spending significantly more money to fix what should have been performed correctly at the first opportunity. However, don't let lawyers and consultants run the process. Seek objective advice and learn from their experiences in similar situations, but remain vigilant and in control.
  4. Develop a business plan.
    If your organization has found a strategic or merger partner that appears to meet the organization's objectives and criteria, insist on developing a business plan that can serve as an implementation guide for the first five critical years of the transaction. This plan should spell out board and management organizational structure, clinical service configuration and location, cost savings, capital avoidance opportunities, physician retention and recruitment imperatives, and improved access capabilities, among other things. Developing a business plan before closing goes a long way in determining if the parties can indeed work together, and it has a way of revealing any hidden agendas.

Identify Deal Killers

Often during the negotiation process, deal killers will emerge. Most times, these deal killers have little to do with the transaction's business objectives and much to do with ego and pride. A board chair with a career in banking once told me that doing bank deals was easier than doing hospital mergers. In banks, as he put it, he could appeal to greed, but in hospital mergers it was all about ego, which made the process much tougher. These deal killers usually involve the following questions:

  • Who will be CEO of the new entity?
  • What is the composition of the new board; that is, how many of "them" vs. how many of "us"?
  • Who is the first board chair?
  • What is the name of the new entity?

This is an area where a board's preparation pays off. Were these so-called deal killers contemplated and identified in the deliberation of strategic objectives? Remind yourself why you are considering a transaction and the strategic objectives you seek to meet in a merger or mergerlike transaction.

Don't let a battle for the top executive position or the first board chair scuttle a good deal for the community. This is not to say that these aren't important issues. Clearly, the selections of CEO and first board chair are critical. The CEO sets the vision and culture cornerstone for the transaction. The first board chair sets the tone for administering the board's fiduciary responsibility for the new organization rather than attempting to represent the past. These key leaders may or may not be in the room, because a new, outside perspective might be a better fit. However, the organization's strategic objectives should be top of mind. These line-in-the-sand, deal-killer issues ought to be contemplated early in the process, lest the organizations risk spending a lot of time and money going down a road that could very well lead to a failed strategic initiative.

One additional point to consider: Sometimes boards try to hedge their bet on a mergerlike transaction by incorporating out clauses in the deal agreement in case something they don't like happens later on. If out clauses are in the arrangement, you can bet at some point someone will want to get out of it. Don't compromise a merger's potential success by burdening it with such clauses. The best course to minimizing transaction risk is doing the homework up front.

Thorough Due Diligence

Upon the signing of a definitive agreement to complete the transaction, due diligence will bring an array of accountants, lawyers and consultants to the table prior to closing the deal. Again, invest the money once and complete due diligence thoroughly. Organizations that take shortcuts near the end of a deal almost always end up regretting it.

It is the board's decision to determine if a merger or mergerlike transaction is the best way to continue an organization's mission and preserve health services to the community. The board's responsibility, as it considers changing control and pursuing a different strategic direction, should be to make sure the deal makes both good business sense and patient care sense. If it achieves these two objectives, it will have done its job.

Larry Scanlan ( is president of Insight Health Partners, St. Petersburg, Fla., the author of Hospital Mergers—Why They Work, Why They Don't (AHA Press, 2010) and a member of Health Forum's Speakers Express service.