What’s your company worth now?

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Wednesday, December 31, 2003

WASHINGTON - When it comes to mergers and acquisitions, the new Medicare Prescription Drug Act isn’t all doom and gloom, say industry watchers.
Dexter Braff

Has your company lost value? Most likely. The multiples buyers pay probably won’t change, as they didn’t following the cuts imposed by BBA ’97. But, because of the cuts to DME reimbursement, potential buyers probably will offer less - at least until you figure out how to recoup the lost revenue.

“But buyers are still interested in buying,” said M&A expert Dexter Braff, president of the Braff Group in Pittsburgh, Pa. “They are not running.”

Case in point: Just days after the U.S. Senate passed the Medicare Drug Bill, Rick Glass was scheduled to close a sale to a national company.

“I got nervous phone calls and calculations as to what the impact was going to be,” said Glass, president of Steven Richards Associates, an M&A firm in Tarpon Springs, Fla. “We renegotiated the price downward 10%. Everyone seemed happy - but it didn’t rise 10%.”

The company sold in this transaction generated 50% of its revenue from respiratory medications, which the new drug bill hits hardest.

“Supply and demand drives [valuation],” added Glass. “I think the demand will be there. It’s a question of what the supply will look like. Will the little guys get scared and feel like they have to go out and sell at whatever price is available?”

There could even be an increase in demand, he said, noting the need for publicly-traded companies like Lincare and Apria to keep Wall Street happy and in turn their stock up.

“They like to draw a line in the sand, put it behind them and say, ‘I took some cuts but now look at me. I’m growing again,’” Glass said.

The bill’s efforts to privatize Medicare may even make HMEs doing significant business with managed care companies more desirable acquisition targets, said Bruce Burns, president of Affinity Ventures in Albuquerque, N.M.

The same can be said for providers in rural markets. Typically, companies looking to build market share through acquisition key on more densely populated areas that hold opportunity for growth. But because competitive bidding is slated to hit large metropolitan areas, building business in rural markets could provide some price insulation, Braff said.

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