M&A 2004: Buyers still very hungry

YARMOUTH, Maine - Despite the Medicare Prescription Drug Act's negative impact on DME reimbursement, Apria, Lincare, Air Products Healthcare and the other big guys still have a hungry-man appetite when it comes to making acquisitions. “If we are going to overcome these cuts, we are going to have to grow through it,” said Todd Christopher, CEO of Home Care Supply, the nation's largest independent HME. “To do that, we'll have to pick up the pace [of acquisitions].” Said another exec at a large HME company: “We are, if not more aggressive, just as aggressive. We have goals to meet in terms of growth and where we are headed.” In 2003, the HME industry consummated 78 acquisitions, a 13% increase over 2002, according to the Braff Group's M&A Annual report, which came out last month and tracks year-to-year acquisition activity in the home care market. For companies that may be thinking of selling - especially respiratory companies, which account for the bulk of the industry's acquisition activity - the good news is two fold: There are plenty of buyers and, because the supply side hasn't increased dramatically, valuations have remained stable. The one exception: companies that generate a high percentage of their revenue from respiratory medications. If reimbursement cuts for meds goes into effect in 2005 as scheduled, what has traditionally generated mouth-watering profits would see most if not all margin dry up. “There isn't a buyer out there who is paying full-value for a respiratory med business,” said M&A expert Bruce Burns, president of Affinity Ventures in Albuquerque, N.M. Rick Glass, president of the M&A firm Richard Stevens & Associates in Tarpon Springs, Fla., concurred: Due to risks inherent in the Medicare Prescription Drug Act, pure respiratory med companies are difficult to sell and valuations have dropped “dramatically.” The Braff Group expects valuations in 2004 for respiratory companies to remain unchanged from 2003: four to six times EBITDA. For companies with substantial nebulizer business, adjust the multiple downward. In the final analysis, “you are not going to get a good company at a bargain basement price,” Christopher said. “If I'm an owner and pulling down $300,000, $400,000 a year, and someone wants to come in and buy my company for little or nothing, I'm going to say, ‘To heck with you. I'm going to stay here and make money.'”