M&A activity runs at snail's pace

The mergers and acquisitions market for home medical equipment companies continued to limp along in the second quarter with deals getting done but not with anywhere near the gusto of years past, including 2005. As in the first quarter, companies that have traditionally fueled M&A activity--Apria, Lincare and Air Products--for the most part sat quietly on the sidelines, all for different reasons. Apria officials want to show analysts that they can grow the company organically as well as by acquiring businesses. Air Products has stepped out of the M&A game to give its new management time to gain their sea legs. Lincare officials have said they want to look into diversifying beyond their core Medicare respiratory patient base. Additionally, recent reimbursement cuts to Medicare oxygen and DME have forced the nationals to re-evalute their growth strategies. Some see these companies gradually ramping up their M&A activity in the second half of 2006, but others aren't so sure. "It's kind of funny: All the old guys--Rotech, Lincare, Apria, Air Products, Praxair--are gone," said Rick Glass, president of M&A firm Steven Richards & Associates. "I think they are all coming back, but right now they don't sound any closer to what they want to do than they did six months ago." Among the most active on the M&A front: Arcadia Resources, a rapidly growing HME roll-up headed by former Rotech exec Larry Kuhnert. Private equity groups are also showing interest, Glass said. "They are looking at it as a big growth industry," he said. "There's some uncertainty, but it's a great time for them because everyone else has pulled back." Regina Bienkowski, vice president of the M&A firm Ultimate Resource, said she's seeing interest from buyers but not a "massive burst of energy" to close deals. Of particular interest to buyers, she said, are well run medium- to large-sized companies that oversee significant respiratory business. She's representing one such business and "everyone wants to see it." In the second half of 2006, Bienkowski expects to see more deals completed by regional companies looking to position themselves for competitive bidding. Bob Leonard, an M&A associate with the Braff Group, described the second quarter sales volume as "substantially down from last year." In fact, he added, "there has been such a drop in activity that you can't call it a normal market." Despite what appears to be a buyer's market, valuations have not dropped that much from last year, said Leonard and other M&A brokers. Leonard compared the situation to what's happening with real estate in south Florida. In that market, sales are way off and inventory way up, but prices haven't come down. "Buyers hope that prices come down and they are going to wait awhile, but sellers are saying, 'I think this is a temporary slowdown and I'm just going to hang on,'" he said.