M&A: Contracts not 'golden ticket'

YARMOUTH, Maine - Some HME providers who want to offload their businesses now that they've accepted contracts for Round 2 of competitive bidding may find it a tough sell, say M&A analysts.

“It's not a golden ticket,” said Jonathan Sadock, managing partner with Paragon Ventures. “There are buyers, but they are not going to spend crazy amounts of money to acquire a contract that is going to take unbelievable amounts of efficiency to try to squeeze any profit out of it.”

Round 2 payment amounts, announced Jan. 30, averaged 45% lower than current fee schedule amounts. They go into effect July 1.

Right after the announcement, there was a definite uptick in market activity, say analysts. Those that are buying include providers who won contracts in markets where they don't have a presence and those who want to ramp up their presence in existing markets, they say.

“We had calls from bottom feeders looking to pay cents on the dollar and calls from legitimately large companies, maybe with some equity backing, that are looking for opportunities,” said Don Davis, president of Duckridge Advisors.

If providers were hoping that large national providers would go on buying sprees, they may find themselves waiting, say analysts.

“The national players that won tell me they are going to wait for July 1 to come and go,” said Patrick Clifford, a managing director with The Braff Group. “They are not feeling compelled to make acquisitions.”

One big question mark for buyers and sellers alike: What are businesses worth? The low payment amounts will likely have an immediate and downward impact on valuations.

“There's clearly a reduction in cash flow, and cash flow is what ultimately drives valuations,” said Craig Hittle, of Somerset CPAs. “Providers understand that cuts can't help, but I don't think there's a good idea of how to quantify that piece and what it means in terms of overall value.”