Over a year ago, we predicted that 2019 would be the era of health IT M&A, with the transition to value-based care as a primary driver. The M&A activity in the first half of 2018 is proof of this momentum – healthcare-related M&A increased 23% compared to the second half of 2017.

Regulatory changes such as value-based care often force organizations to become more competitive to remain profitable. Companies both small and large are feeling the pressure to adjust, causing them to look to mergers and acquisitions for new means of growth or as an exit strategy. However, regulatory shifts are not the only factor at play. Companies are scrambling to seize M&A opportunities now because of what the next couple of years may have in store.

This type of long-term strategic planning has made headlines recently – Amazon acquires PillPack, CVS Health merges with Aetna – the list goes on. These big-name deals suggest a defensive posture in the face of an uncertain future. These companies and others are realizing that if there is an opportunity to be part of something larger, then now is the time to get moving. Here is why:

Election years are years of inaction

2020 is an election year. If history is any guide, the direction of regulation will be largely undetermined, and industry stakeholders tend to wait to see where the chips fall before acting on any potential deals. While this may not be an issue for well-capitalized, large health IT companies, smaller companies may feel the impact. Those working tirelessly to make themselves known in a crowded market will feel their momentum stall and potentially decline, as investors and customer pipelines tend to dry up in times of uncertainty.

The yield curve prophecy

One of the most telling indicators of long-term financial health is the yield curve, a tool used to predict changes in economic output. A normal or up-sloped yield curve indicates periods of healthy economic expansion. On the other hand, an inverted yield-curve demonstrates a fear in long-term investment value. In the last 60 years, each time the yield-curve has inverted, our country has gone into an economic recession. While our economy seems strong today, financial experts are starting to see the yield curve invert, meaning our economy is at risk of weakening within the next 18 months.

The potential for recession does not mean M&A activity will come to a sudden halt. However, the temperament around M&A this year vs. 2020 will be drastically different. Companies may seize the opportunity to exit earlier than they might otherwise choose in order to capture value now versus waiting to see what happens through 2020. Likewise, larger health IT companies with the strength to weather the storm could build value by capitalizing on the vulnerability of smaller companies, acquiring them for a lower price if the market starts softening or acquiring for stock now, conserving cash, and de-risking their long term growth plans.

In contrast, if the economy begins to soften and capital markets become tighter, companies will shift from engaging in a profitable acquisition or exit strategy, to one that may be more hostile in nature or done out of desperation.

With this in mind, health IT companies interested in merger or acquisition activity must get ahead of this before it’s too late, as evaluations and exit opportunities will be much greater and more valuable for the duration of 2018 and early 2019. Because it may be harder for smaller health IT companies to thrive during a recession, now is the time to plan a growth strategy in order to be well positioned for the future. This may mean raising funds or identifying opportunities for mutually beneficial mergers or acquisitions.

Timing is everything

While the potential for instability may seem daunting, companies must build on the momentum of a strong economy now, reevaluating potential partnerships and one’s strategic position in the market. Chaos creates opportunity, and as evidenced by the record-setting M&A activity this year, industry leaders are realizing that we are stronger together.