M&A activity continues to be slow in 3Q99, new report says
By MEREDITH BONNER
HHBR Editor
With a clear cut prospective payment system (PPS) now in sight, the home health industry might begin to see a resurgence in merger and acquisition (M&A) activity, said Sanford Steever, editor of the Irving Levin Associates (New Canaan, CT) 3Q99 Health Care Merger & Acquisition Report.
Activity, however, remained low in 3Q99. According to the report, there were 8 publicly announced transactions in 3Q99 in the home health segment down 50% from 3Q98, and down 60% from 2Q99.
Steever told HHBR that since the PPS proposal has been released, people should be able to calculate what their earnings will be and where their strengths and weaknesses will be once it is in place.
"The industry is driven by the BBA (Balanced Budget Act of 1997), and until relief from that trickles down to the providers, it is still going to be a thick market," he said. "People are obviously making a living doing this, but it’s tight." He added that BBA relief is going to take some time to reach the level of providers.
Agreeing with Steever, Dexter Braff of The Braff Group (Pittsburgh) told HHBR that the light at the end of the tunnel will come from a rebirth of the home health agency (HHA) side of the business.
"We firmly believe that will happen once the PPS program is fully vetted," Braff said. "Once it hits and people understand it, even if it’s horrible, there will be an increase in activity in the HHA sector because now providers will be able to see what the future holds for them; there will be more stability in the market. Then we will see companies buying again."
Some providers, Steever also said, see the slow activity as an opportunity to buy.
"Pricing is going to be low, and obviously there are a lot of small companies on the market," he said. "The problem is financing the deals. The companies have to be really good to convince bankers to do the deals."
A good M&A market, Braff told HHBR, is good for the industry because that means all the players are seeking to get better, grow, get profitable, and gain more share. When that happens, there is a lot of competition and opportunity for making money, he said.
"A good M&A market encourages innovation and growth, and encourages people to then create companies that can be acquired," he said. But Braff added that when activity becomes greater, there can be major consolidation, and there could end up being two or three major players, which would reverse the competition level.
Steever said that when and if the industry does start to see some relief, he thinks a lot of growth will be achieved through acquisitions or mergers. But he said that won’t happen in the near future.
"I have heard that Coram (Denver) is going to step up its acquisition program, which has been dormant in the recent past. So there are acquirers out there, but it will be a while. There might be buyers, but they don’t have the financing." But Steever added, "Once they come back to some financial help, they will be buying."
There were 163 publicly announced mergers and acquisitions in the entire healthcare services market during 3Q99, the report showed, 19 fewer than in the previous quarter. The total number of transactions was down 42%, from those in 3Q98, the report showed, and the number represents the lowest activity since 1995. Most of the transactions involved physician medical groups, hospitals, and long term care organizations, accounting for 52% of the total deals reported. According to the report, rehabilitation services saw the least amount of activity, with only two transactions for the quarter.
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