M&A market begins slow turnaround

YARMOUTH, Maine — After several lackluster years, the M&A market for home medical equipment companies is starting to show signs of life, say analysts.

“It's looking like a dramatic pick-up starting late this year and running into next year,” said Rick Glass, president of Steven Richards & Associates. “Round 2 is going to have an impact on a large number of people and it's going to motivate some of them to try, through acquisitions, to replace some of the profits they are losing and get more scale.”

According to a recent analysis by The Braff Group, there were 25 HME deals in the first quarter of 2012, the largest number since 2005.

Despite those encouraging numbers, buyers are still soft on the traditional HME/respiratory model.

“Where we are seeing the deals take place is complex rehab and supplies,” said Patrick Clifford, a managing director with The Braff Group. “They are not currently affected by competitive bidding, and where they can see three, four and five years out without a significant impact to revenue streams, buyers are diving in.”

In markets where competitive bidding is a factor, Round 2 is different than Round 1, when buyers took a wait-and-see approach.

"With the first round, nobody really knew what the playing field and the benchmarks were going to be," said Bruce Burns, president of Affinity Ventures. "That's settled down. Most companies know what those numbers are going to be and they are calculating in the projected cuts."

While the up tick in activity is a welcome trend, it's still a buyer's market, say analysts.

“The effect of competitive bidding is that it is allowing buyers to determine their risks better,” said Don Davis, a financial consultant with Duckridge Advisors. “Sellers are aware of what buyers are paying and are reluctantly but nevertheless accepting that the valuations are here to stay.”

For companies looking to sell in any market, it's important to understand the valuation metrics that buyers are working with, cautions Jonathan Sadock, partner and CEO of Paragon Ventures.

“Make sure you're business is really prepared, because buyers are gong to be looking very closely at it,” he said. “They are being very careful to understand your business model and your plan as it relates to competitive bidding if that is part of your market.”