Contrarians at Heart: Riding the Bull Market in Imaging

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Acquisitive firms have long been earmarked for challenges based on academic research predicting high failure rates for such companies. While valuation, timing, and culture all play critical roles in a deal, many successful companies rely heavily on acquisitions to achieve their strategic goals. Health Diagnostics, New York City, is one such company, actively pursuing entrepreneurs in an industry that we feel holds spectacular long-term promise. This bullish position is based on an aging population, expanding applications for the technology, and the inevitable evolution toward fewer, but higher-quality, service providers and facilities.

Still fragmented and ripe for consolidation, today’s diagnostic imaging market seems to be at a crossroads. The impact of the Deficit Reduction Act, a tightening credit market, and expanding payor influence have created the perfect storm, which has generally discouraged both the financial investors (who remain averse to risk) and strategic players (who remain highly leveraged). With this sort of slowdown, you might imagine that it is a buyer’s market, but that’s not exactly true.

Since its inception in early 2007, our team at Health Diagnostics has quietly grown to include 38 owned and managed facilities in five states through the careful pursuit of experienced and successful entrepreneurs. The brand is certainly new, but the core management team comprises a long list of seasoned veterans in diagnostic imaging. Rich DeMaio (Northeast), Xavier Rodrigo (Southeast), and Brad Hummel (West) are led by COO Tim Damadian, formerly of Integrity Healthcare, New York City. A principal belief shared by this team is that good people are hard to find and great companies (even in this environment) are equally difficult to identify.

A Platform for Growth

One could argue that every market has plenty of acquisition targets, but like art, deals are subjective. CFOs will affirm that numbers don’t lie and financial performance is a powerful qualifier for the health of a company. At the same time, some of our executive team’s past experiences in consolidating the advertising, Internet, and business-services industries emphasized the human-capital equation of any deal. Similarly, diagnostic imaging is a local service, run by people, for people, and typically by smaller entrepreneurs. What basic strategies have worked, in analogous industries, that still apply to imaging? Invest in people, not machines. Technology is a commodity and while the 1.5T MRI is the asset on the books, our primary focus has always been on the passionate, experienced entrepreneur who wants to trade up and help us lead the organization in an operational, expansion-focused, or clinical manner. From physicians to operators, this remains the principal factor in the success of a deal, both before and after it takes place.

Be considerate. Most business owners have never sold a business. A decision to sell comes with great deliberation and has life-altering impacts. Maintaining a sense of customer service and patience with the seller and defusing the stress are paid back, in spades, when that seller becomes part of your team. Often, owners have invested time and energy to build an ecosystem of local vendors, partners, and customers, and while it’s hard to measure, it’s an asset worth preserving.

Work with sales early. A sales force is often the face of a company. While back-end synergies are a given, organic growth through measurable, accountable, professional sales discipline is a dying art (or, it could be argued, has never existed) in the industry. Ensuring that the new sales team clearly understands our philosophy, direction, and expectations and has the resources to earn market (and wallet) share has been a winning strategy from the outset. This strategy is proving itself useful today in our business, and has been applied in other rollup industry experiences in our past.

In Need of Help

It would be naive and dangerous to believe that we have it all figured out. Just read the newspapers, and you’ll see that our industry has been labeled with terms like overleveraged, fragmented, and in need of reform. Consolidation has even been attempted before, and it failed for four chronic reasons:

  • press-release deals made for the facility count’s sake, without commitment to real back-end synergy and investment;
  • disregard for mounting debt obligations;
  • absent consideration for geographic concentration; and
  • failure to recognize the