Acquisition market: Buyers and sellers 'don't know what to do'

Thursday, July 22, 2010

Once CMS announced the competitive bidding amounts, industry watchers expected the M&A market for HME to open up a little bit, but that hasn't happened. Why? Buyers and sellers have "sticker shock," watchers say.

"The problem is people thought it would be a 20% to 22% cut, not a 32% cut," said Bruce Burns, president of Affinity Ventures, an M&A firm in Albuquerque, N.M. "Now they don't know what to do. People who didn't win bids are saying, 'I wouldn't take those prices, anyway,' and people who won bids are saying, 'It's going to be really difficult to push any profit to the bottom line.'"

Watchers say they're fielding fewer calls from winning and losing bidders who are looking to sell and buy than in 2008, when CMS took its first crack at competitive bidding. They're fielding virtually no calls from private equity firms and others outside the HME industry looking to get in.

Even Lincare, who watchers expected to make acquisitions in areas it didn't win bids, has said thanks, but no thanks.

"I think they were trying to make the statement that, 'We don't think this is right; we think the prices are too low,'" said Bob Leonard, an analyst with The Braff Group, a Pittsburgh-based M&A firm.

Despite the lower-than-expected bid amounts, watchers don't expect "a huge swing in valuations" for HME companies.

"Competitive bidding has been a part of the equation for a while now--more in the 25% range than the 32%, but it has been part of the equation," said Rick Glass, president of Steven Richards & Associates, an M&A firm in Tarpon Springs, Fla.

There's still time for the market to perk up, especially once CMS makes public the list of winning bidders, something that's supposed to happen in September, watchers said.

"As soon as they do that, there'll be more of a shopping list to work from," Leonard said.