Meet The New Boss
By Matthew N. Skoufalos, August 09, 2011
When a marketplace matures, competition heightens. Revenue streams dry up. Customer pools converge. Corporations partner and consolidate; sometimes not of their own accord. Survival in an environment that appears to benefit larger, more vertically integrated organizations presents an increasing challenge for smaller, independent businesses.
“The U.S. economy is going to be 55 percent medical industry and health care in the near future, so the big players are asking, ‘How do we get a bigger piece of that pie?’” – Rick Staab
In the imaging market especially, consolidation represents the pulse of business. For the most part, products have become commoditized. Profit margins have eroded. Providers are even pooling their resources to draw from larger patient groups. If this convergence is symptomatic of greater things to come in the aftermarket sales and service industry overall, then imaging products could be the first big domino to fall.
An Evolutionary Phase
Curtis Kauffman-Pickelle, publisher of Imaging Biz magazine and Radiology Business Journal, sees the current state of the industry as a natural evolutionary phase rather than anything atypical.
“The pie in many respects is shrinking,” he says. “It’s characteristic of the kind of market that we’re living in now: it’s no longer in its infancy; it’s no longer in its meteoric growth phase, which we’ve experienced over the past 10 to 15 years. [Consolidation is] an accepted part of the health care model and a major contributor to the cost side as well as to the health care delivery system.”
“In many modalities it has been pretty quiet, so it’s only natural that some consolidation starts to occur, and businesses are going to have to look at how they can adjust and realign their resources. It’s a sign that third party is really starting to mature.” – Ryan Dienst
Larger business entities can sustain their operations and even thrive under such conditions. They often have the ability to serve a larger area of operations and can retain more personnel to take on more work. Companies like Aramark, Philips, GE and Siemens are always on the lookout, however passive, for ways to expand their product and service offerings. With the capital they command, it’s far easier for them to diversify their holdings by backing an established, albeit smaller, player rather than starting from scratch.
But some equity groups, says Kauffman-Pickelle, are willing to make “reach investments” just to increase their operational footprint in such an atmosphere.
“I don’t think it’s just a consolidation of equals,” he says. “The name of the game is increasing economies of scale. Two or more organizations can put themselves together to extend into areas where there wasn’t a presence. That’s happening in the provider marketplace too. Creating a much larger ancillary services footprint is part of the strategy.”
Kauffman-Pickelle cites two such recent mergers as economy-of-scale partnerships. The Fort Worth-based Radiology Associates of North Texas was formed in March 2011 from the three-practice merger of Radiology Associates of Terrant County, Southwest Imaging and Interventional and Grapevine Radiology Associates. The deal produced the largest radiology group in the state of Texas and one of the biggest in the country, employing 110 radiologists and some 250 staff.
The second was the February 2010 strategic alliance of 13 private-practice radiology groups comprising 750 physicians under the banner of Strategic Radiology. Uniting physicians from Spokane to Columbus created an organization designed specifically to capitalize on a larger market presence with additional vendor buying power.
“To me it’s an indicator of the kind of consolidation and mergers that are happening all across the country, or at least in some respect,” he says.
“If you’re a vendor or an OEM or a refurbished equipment seller, these kinds of moves in and among your customer base really kind of reshape the market. That consolidation is robust, ongoing, and creates a lot of implications for those selling equipment.”
As their customers increasingly demand lower-cost equipment and maintenance services, Kauffman-Pickelle believes OEMs especially have become interested in integrating their businesses from the pre-owned sales and service market.
“I talk to a lot of them who three to five years ago would not have been terribly interested in a refurbished equipment strategy,” Kaufman-Pickelle says. “Today they are. “The reason the big vendors are now going to pay more attention to this market niche is because they’re looking for every revenue source that they can find. They’re seeing their ability to maximize their return on investment increase with this vertical integration,” he says.
Name That Tune…Before It Changes
What are customers to make of such a marketplace? When an OEM buys up an aftermarket vendor whose clients have been hearing for years about how important it is for their bottom lines to avoid dealing with bigger, impersonal companies, how do they reconcile the conflicting messages?
“If an OEM says that refurbished equipment wasn’t really a big part of their portfolio in the past, and now it is, it’s pretty understandable that they’re going to want to re-characterize the discussion in their favor,” says Kauffman-Pickelle.
“It’s just more complex to get your particular story told within this very high noise level that’s really the result of this complication,” he says. “You take disparate organizations and you have a big requirement to create a new corporate culture. For the average employee, really understanding a new and different marketplace is complicated by the fact that they’ve got to understand a new corporate culture.”
Such may be the case for several companies in the secondary equipment, service and parts industry, which has been significantly restructured by consolidation. In June, the small, private equity-backed parts company AllParts Medical was sold to Philips. In March, Aramark bought Masterplan and ReMedPar to become the largest independent service organization in the country. In 2009, three imaging service companies merged to create Unisyn Medical Technologies, also backed by private equity, and independently owned Global Medical Imaging (GMI) took on a private investment. While the influx of cash from private equity or a large OEM can help a company expand its operations and market share, the adjustment to a corporate culture—and learning a new way of doing business—isn’t always an easy one to make.
But sometimes the offer is just too good to pass up. “If the company is worth 10 million,” says Rick Staab, President of Alachula, Fla.-based InterMed, “right now I think they’re getting 15 to 20 million.” He says he’s taken calls from investors interested in buying InterMed, though he hasn’t made plans to sell.
Staab doesn’t expect those calls to stop coming anytime soon. “The U.S. economy is going to be 55 percent medical industry and health care in the near future, so the big players are asking, ‘How do we get a bigger piece of that pie?’ The fastest thing you can do is start buying companies and growing in areas of the market where you didn’t have a presence before.” Staab says that when a major player in the market starts acquiring smaller companies, the competition takes notice, and the whole process is accelerated. “There’s a domino effect and now there’s a scramble, and I get calls because of the buzz of consolidation.”
Still, he says he’d prefer to continue to expand independently. “I’m pretty secure with our position in the marketplace,” he says. “My biggest fear would be to lose everything we built up. That’s always the hardest thing for the big guys to do. They can’t create a culture like the small companies had—like we have at InterMed.”
It’s rarely possible to maintain the culture of a small, independent business after a buyout or acquisition, he says, especially when leadership changes. “There’s no way founders can create a culture and then bring in an investor to buy majority share without changing the culture. It puts everybody on pins and needles.”
Ryan Dienst, former CEO of GMI, says that some acquisitions can be mutually beneficial. When GMI acquired an imaging company from Texas, the company doubled in size without changing the culture. “We were a small company buying a small company, so it was much more personal.” The companies had worked together for a year before the merge. During that time, each learned the other’s operating philosophy, which turned out to be similar. “We had a chance to sort of date and get to know each other well,” before deciding it was a fit.
“When it’s two equal parts,” Dienst says, “they can be successful. But when a multibillion manufacturer buys a small company, the small company is going to lose, no matter what they do.”
Still, consolidation is not bad news for third parties as a whole. “The small ones getting bought have a niche – they have something the big guys want,” Staab says. “It’s a sign the economy is able to grow again, so that’s a good thing,” Dienst says. “In many modalities it has been pretty quiet, so it’s only natural that some consolidation starts to occur, and businesses are going to have to look at how they can adjust and realign their resources. It’s a sign that third party is really starting to mature.”
Terry Mackin is the Managing Director for Generational Equity, an acquisitions specialty agency based in Dallas, Texas. He says that depending upon the kind of merger—strategic or investment—success is not measured in the same terms for all parties.
“We’re in a touchy-feely world now,” Mackin says. “People like to know that their world is not going to change; that there’s not going to be any upheaval in it. That when a new company comes in that they’re not going to have to wear ties when everybody’s gotten used to wearing open shirts, or use an electronic hourly machine when everybody’s been coming and going on their best behavior.
“I spend a lot of time talking with buyers when we’re close to getting a deal done on how they need to approach the employees, comfort them in the transition, and understand that there is this emotional side of it,” he says.
“That puts them in a position to come in looking like the good guy, not the bad guy who just kicked the owner out, but who can try to up-sell those things that are going to be the positives, no matter how small they may be or how unimportant they may seem to the buyer,” Mackin says.
,p>Managing expectations from both owner and employee perspectives is critical not only to maintaining a healthy work atmosphere but also to realizing the value of the deal. The standard 10-15 percent downturn in cash flow that comes typically within the first six months of any acquisition can be prolonged by someone who comes in looking to clean house because he thinks it will net a quicker return on investment.
“You already have a group of employees concerned about their future and their jobs, and you have the possibility that they could be bolting,” Mackin says. “The buyer may not be one step ahead of that in terms of thinking of it as a last resort.”
Wherever else any changes in the corporate environment occur after such a merger, Mackin says it is most critical that the sales team is onboard from the beginning.
“Those are the people who are talking to customers every day and have to accept that culture change immediately and come up with a different way of talking about it,” he says. “Successful companies that consolidate already have the things in place that allow them to integrate or reinitiate the salespeople in the thought process of the organization.”
Whether the industry is prepared for it or not, Mackin says, health care in general is rife with mergers. From geriatric care to pharmacy groups, companies are leveraging size as a survival mechanism—even though increasing their corporate footprint by moving into different regional areas can also increase their susceptibility to unforeseen problems.
“You want to be able to do business, make money and provide services in as large a geographic area as you can,” Mackin says. “When you step over state lines, you risk the possibility of being hit with cost cutbacks that are related to the way a state runs health care. But at the same time, when opportunities come up in other states, you want to be able to take advantage of them.”