The healthcare sector has emerged as a critical player in M&A, clinching the third-largest deal in EMEA so far this year. However, the landscape has seen significant challenges since its peak in 2021. Despite these hurdles, M&A remains a powerful tool for healthcare companies looking to transform and adapt. Experts recently discussed some of the factors shaping healthcare M&A, from shifting investment dynamics to the growing role of technology and AI.

Sector Challenges and Trends

The M&A landscape in healthcare has undergone notable changes, marked by declining deal volume and value since 2021: at H1 2024, deal volume in EMEA fell by 23% yoy, with 530 deals completed and total transaction value also decreased by 11% yoy to $36.6 billion (Deal Drivers: EMEA HY 2024).

So, what’s driving this slowdown? Several factors, it appears. Investors, especially in private equity, now prioritize stable, visible growth over aggressive expansion, with risk management and downside protection being paramount. Rising interest rates have made traditional buy-and-win strategies less viable, impacting deal underwriting. Many high-quality assets acquired during the 2021 boom remain with their current sponsors, limiting acquisition opportunities. And investors are increasingly targeting high-value transactions with robust growth potential or opportunistic deals at discounted prices, sidelining mid-tier transactions.

Nevertheless, the healthcare M&A market continues to hold promise. With significant dry powder at the ready, private equity firms appear poised to re-enter the market as many assets near their exit cycles. And while valuations have rationalized, high-quality assets still command premium prices, creating opportunities for growth-driven transactions.

Moreover, deals now seem to be focused on reinforcing core platforms, improving capacity, or expanding geographic reach rather than pursuing rapid growth. The ongoing transition from aggressive expansion to strategic consolidation is shaping current M&A strategies, with divestments of non-core portfolios creating potential opportunities.

The Evolving Role of Technology and AI

Seizing these opportunities increasingly involves technology. And no current technology conversation in M&A can be had without discussing the role of AI, particularly in due diligence and deal execution.

AI adoption has steadily increased over the past 18 to 24 months in M&A, providing tools to streamline processes and drive operational efficiency. In fact, of all the dealmaking processes to be impacted by AI, due diligence is a key area that is already being transformed by AI. At its core, AI is a strategic enabler – helping to provide insights and greater efficiency in due diligence. A 2023 Datasite survey of 500 global dealmakers showed that most expect that AI will help speed up deals by 50%. But despite this awareness, over 60% of dealmakers acknowledged that their organization has low adoption or are only using it experimentally. But, it’s on lots of radars: 66% said exploring the use of new AI tools is their top area of operational focus next year.

Moreover, Datasite has found that for both EMEA and globally, while the average length of healthcare projects is down yoy, the amount of project data is up. Which means that healthcare deals are requiring more content, in line with an overall dealmaking trend that more data is needed to conduct due diligence due to bigger and more complex projects, more users, and more types of diligence

So, how are dealmakers using AI in due diligence? In M&A, AI tools can quickly upload and analyze reports and documentation, reducing the time required to sift through vast datasets, and manage repetitive tasks, allowing for more focus on strategic decision-making.

AI is also improving internal processes, such as managing sales forecasts, responding to information requests, or handling routine queries, enhancing overall efficiency.

AI and technology are also playing a broader role in streamlining the M&A lifecycle and creating value for investors. Firms are increasingly relying on advanced analytics to understand potential targets’ financials and strategic positioning. AI can also help maintain active target lists, continuously updating criteria for investment opportunities, and refining investment theses, enabling better alignment with growth strategies.

However, despite its promise, AI adoption in healthcare M&A faces significant obstacles, primarily due to the high levels of regulation in the sector. Concerns about data security, reliability, and change management slow its full integration.

In fact, Datasite found that 36% of dealmakers cited data security and privacy as the primary concerns in using AI tools. Additionally, 73% felt that AI in M&A should be more regulated. And one of the key challenges AI faces in the M&A space is the hesitancy of some organizations to open their data to external AI tools, primarily due to security concerns. Many sellers, for instance, are reluctant to allow buyers or other third-party participants to use AI tools on sensitive data within data rooms. Moreover, the life sciences industry is known for having complexities and strict compliance requirements around data. As such, firms remain cautious about using AI for critical, sensitive processes, balancing efficiency with the need for trust and accountability.

So, while AI and technology can enhance efficiency, human interaction remains crucial for building relationships and closing deals. Many professionals believe that a blended approach, combining technological tools with human expertise, can ensure better outcomes. As the industry evolves, success will depend on adaptability, strategic focus, and the ability to balance innovation with traditional best practices. And with the right mix of technology, expertise, and strategic foresight, M&A can remain a powerful lever for transformation and growth in the sector.

To learn more about how Datasite can help you with your next healthcare deal, click here.