Mergers & Acquisitions: PE groups seek strong managment

A. There are several factors contributing to strong PEG interest. First, DME entrepreneurs are finding new ways to operate profitably. Second, there have been numerous “roll ups” of smaller DMEs within geographic areas. Third, PEGs have a lot of uninvested capital and are thus in search of opportunities in fragmented markets that have many small-revenue companies, like DME. In other words, PEGs believe there is growing opportunity in the DME market, even though the environment can be challenging for smaller companies.

PEGs, aka financial buyers, represent the proverbial cream of the crop of U.S. capitalism. PEGs are where the wealthy put their fortunes to work to seek out opportunities. PEGs typically seek fragmented markets with lots of “roll-up” opportunities, a scalable model that can rapidly be expanded with new capital, and a defensible market position created by a high barrier to entry. In DME specifically, they seek out companies that have a strong management team.

Financial buyers generally believe they can be most successful by working with existing DME management talent and so they often incorporate the retention of this talent as a key element in their offer. The good news for DME management is that the buyers typically build post-closing incentives for growth into the agreements with management. This can create a win-win situation that makes success of the venture more likely.

PEGs believe that they can help the DME healthcare market evolve and consolidate into larger, stronger, healthier companies. If the track record of PEGs in other, similar markets is any guide, they're probably right. hme

Brad Smith is managing director/partner at Vertess. Reach him at bsmith@vertess.com.