Putting the Pieces Together

It's no secret that many home medical equipment providers hope to sell their businesses soon. With competitive bidding looming large plus new rental caps on oxygen and DME, many would sell today, if only someone would make a good offer.

But according to merger-and-acquisition experts, providers who were dreaming of selling out will have to sleep on those visions a while longer.

The industry's unpredictable conditions have sent what had been a relatively busy M&A market into a stall, according to Dexter Braff, president of Pittsburgh-based The Braff Group, an M&A firm specializing in the health care markets.

“Demand [for HME companies] is substantially lower today than it has been, and valuations are not as robust as they have been,” says Braff, who has been tracking M&A trends in the HME industry for years now. Over the last 27 months, he says, there has been a marked decline in transactions.

In 2005, Braff counted 95 HME deals. But in 2006, transactions declined by 40 percent to 57. And in the first quarter of 2007, only five HME companies changed hands. “If you annualize the first quarter's transactions, you would have about 20 deals,” Braff notes. “Overall, there has been a dramatic decline in activity.”

Uncertainty Has Stalled M&A

“The four or five large companies that have been active HME buyers have not bought much of anything for 18 months,” adds Rick Glass, president of Steven Richards & Associates, Tarpon Springs, Fla. “The reason is uncertainty about reimbursements caused by the move toward competitive bidding and the new 36-month cap on oxygen rentals.”

In the world of mergers and acquisitions, buyers value target companies by evaluating future profits, Glass says. If an issue threatens to depress those profits, M&A activity would probably continue; buyers would simply cut their valuations in proportion to the predictable decline in profits.

But uncertainty undoes everything. Today, given the Deficit Reduction Act's 36-month oxygen cap, what used to be a stable sector has suddenly become unsettled. There are questions about maintenance and repairs, who is responsible and who will pay for what once title of the equipment transfers to beneficiaries as the law requires.