Competitive bidding fuels acquisition activity

YARMOUTH, Maine - M&A activity in the first nine competitive bidding areas (CBAs) appears to be heating up as some HME companies that lost bids try to buy their way into the program.

"There are companies servicing one of the first nine CBAs that did not win a bid and they do not want to stop servicing Medicare beneficiaries," said Jeff Baird, an attorney with Brown & Fortunato in Amarillo, Texas. "So they are going out and finding contract winners to buy."

Baird said he and other attorneys at Brown & Fortunato are "up to our necks" processing deals in all Round 1 CBAs.

Also fueling the M&A activity: A lot of the winners have begun to realize that they don't have the resources to service the contracts.

"I'm seeing companies out there that never should have won," Baird said. "I'm seeing that a lot. I've got one client in a CBA who was awarded 47 contracts across all nine CBAs. He doesn't know what he is going to do with them."

Industry M&A brokers say they have not seen the robust buying activity that Baird reports. That could be because prices are so low that sellers have opted to forgo brokers, said Rick Glass, president of Steven Richards & Associates in Tarpon Springs, Fla.

"In the first go round, winners were acting like it was the Wild West and that they'd struck gold," he said. "It has been a lot more muted this time around."

On average, sellers can expect to receive between 30 cents and 70 cents per dollar of revenue, depending on a company's size, product mix, etc., industry M&A brokers say. That's about half of what they could expect two years ago.

Industry watchers attribute the decline in value to two factors. First, the contract prices for the Round 1 rebid are lower than the original Round 1. Secondly, Lincare, Rotech and other large providers won contracts in the rebid. In the original bid, they sat on the sidelines, intending to buy their way into the program. In short, it's a buyers market.

"OK, you've got a contract at abysmal pricing," said Bob Leonard, a managing director with The Braff Group in Pittsburgh. "It has to work economically for the buyer. The question is: Is what's right for them good enough for you?"