Is the Price Right?

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Curtis Kauffman-PickelleOn October 9, at the RBMA 2012 Fall Educational Conference in Chandler, Arizona, I had the honor of moderating a panel discussion, “Is It Time to Buy, Hold, Sell, or JV?” The faculty participants discussed the very nuanced art and science of building a success strategy for the potential transactions—merger, sale, alliance, joint venture, and so forth—that imaging executives might be pondering. It was a wide-ranging discussion that included some incredible advice from seasoned experts on the key elements to be included in a winning strategy for any negotiation that involves maximizing asset valuation.

Cat Vasko, ImagingBiz editor, posed several relevant questions to panelists Todd Sorensen, partner with valuation company VMG, and Doug Smith, head of the strategic consulting division of Integrated Medical Partners. These two thought leaders offered general-session attendees a glimpse of how imaging executives can take full advantage of the existing deal climate while making the best decisions for their respective organizations.

There were several things that struck me during the discussion, and key among them was the notion that many imaging-center executives and radiology groups contemplating a transaction of some type do not have a game plan in place—there is no detailed strategy for how best to respond to the inevitable queries from their hospital customers/partners about changing the structure of the relationship. According to Sorensen, these inquiries and deal propositions are based primarily on the existing rate differential that accrues to the hospital’s benefit, since its reimbursement structure provides an immediate boost to revenue in a restructured arrangement where the hospital takes majority ownership of a typical outpatient imaging center.

Consolidation is in the air. As I have written in previous columns, this level of activity is emblematic of a maturing marketplace and is an inevitable part of the adjustments that strategists make to buff up their market share, economies of scale, and contracting clout. It is here to stay, and we are likely to see some interesting business combinations, each of which will have included the exhaustive process of getting the valuation piece right and producing the best benefit for the stakeholders.

The point was made that one cannot enter into a negotiation—or even begin to contemplate a deal—without the benefit of a comprehensive strategy designed to succeed for the long term. The rate differential that is driving many current deals is a short-term strategy, and it’s one that is likely to fade quickly when the regulators drill down on the basic premise of the deal. It is far better for the enterprise (on whichever side of the potential deal) for the business combination to make sense beyond the quick revenue boost associated with a switch to the hospital’s more generous billing arrangement.

In a consolidating marketplace, bigger is quite often better, and we are seeing several alliances and new affiliations that make strategic sense. The key driving forces behind the best of these include the new entity’s ability to negotiate legitimate payor contracts, based on enhanced patient access; its ability to consolidate and streamline overhead; the combined organization’s expanded competitive footprint; the radiology group’s ability to offer true subspecialization and quality assurance; and a strengthened balance sheet, based on efficient asset allocation—among other benefits.

Bigger is not better in every case, however. It is only better if the strategic plan says that it will be better because of the criteria outlined in the assumptions and expected gains of a larger enterprise. Joining forces out of panic—or fear of missing out on a short-term bonanza—is not a winning strategy, and it is likely to result in major disappointment on both sides of the deal.

Be prepared. The business-transaction game is like chess, and winning is dependent upon your ability to anticipate moves in advance and to have your strategy in mind before you are locked into a move that you were unprepared to navigate.

Curtis Kauffman-Pickelle is publisher of ImagingBiz.com and Radiology Business Journal, and is a 25-year veteran of the medical-imaging industry. He welcomes your comments at ckp@imagingbiz.com.