Will M&A market rebound?

PITTSBURGH - With M&A-related positions at Lincare, Apria and Rotech on his resume, Jeff Freedman knows what makes national HME providers tick. Or if you're talking about the first and second quarters of 2006, not tick. The nationals have been eerily quiet this year, making few or no mergers and acquisitions. But Freedman says, as some of the uncertainties like competitive bidding become more defined, they'll start buying again. HME News: Why have we seen a slow down in the M&A market? Jeff Freedman: It's directly the result of reimbursement pressures and uncertainties, and there are multiple avenues where that pressure and uncertainty exists--whether it's reimbursement for oxygen or respiratory meds, and competitive bidding. That has made everyone more cautious. HME News: If you're a Rotech, Apria or Lincare, how spooked are you by the changing reimbursement environment? Freedman: I certainly think the industry, as a whole, is more concerned and cautious now than it was during, say, BBA '97. Back then, there were fewer uncertainties--the changes were more defined. The industry knew what to expect; providers knew what their exposure was. Now, it's a little more open ended. HME: Do you believe the M&A market will heat back up? Freedman: We're cautiously optimistic that by later this year or by the first quarter of next year, some of these uncertainties will be more defined. As a result, buyers will begin to look to grow their businesses again. But that may mean getting into new markets and product lines. HME: In the past, respiratory companies with strong Medicare businesses have been the top acquisition targets. Is that changing? Freedman: Some may look at other markets, but others, as the uncertainty becomes a little more defined, may continue to focus on their core competencies, including the nationals who focus on respiratory. HME: What about payer mix? Will providers look to managed care and other payers, as Medicare reimbursement becomes less and less attractive? Freedman: Some buyers are taking a broader look at their payer mix. There are some buyers out there who have gradually started to add managed care and other payers, but it's a matter of how quickly they'll want to accelerate that. HME: There have been quite a few private equity and venture capital firms entering the market. Is this level of activity unusual? Freedman: There's always been an interest, but right now, I think we're noticing it more because there are so few other transactions. HME: What do these companies see in HME? Freedman: While you have reimbursement pressures and uncertainties on one side, you have demographics and population trends on the other side. Those are very positive and unlikely to change.