Scanning Imaging’s Deals

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Among the more interesting dramas unfolding in the medical imaging profession these days are the number and variety of transactions that are either in the pipeline, in the process of due diligence, or otherwise in some organization’s strategic plan for 2010. Consolidation is one of the indicators of a maturing marketplace, and it is clear that imaging is maturing. Another indicator is commoditization, and when combined with the push for consolidation to find economies of scale, these factors have an enormous impact on the environment and climate for deals.

Hospitals are attempting to acquire OICs, immediately transforming them into more profitable practices through their ability to bill Medicare as provider-based entities, thereby leveraging the hospital’s strength as a market aggregator. These deals have emerged as the trendy option to show short-term gain for the two entities involved in the structure.

Strong and focused radiology practices are hoping to merge, acquire, or otherwise combine with weaker competitors in an effort to boost their market footprints, gain market share, or bulk themselves up in preparation for a future in which a practice’s size will be an increasing requirement for continued sustainability. These deals are springing up in what were once crosstown rivalries, and they are likely to continue to fuel the environment for alliance building.

Then there are the practices and/or centers that have concluded that the best days of the market are behind them, and that the time has finally arrived to take their winnings off the table, cash out, and move on to the next best business or specialty. There are lots of these potential deals coming to the surface, but they are the least likely winners in the equation, primarily because many of them have simply waited too long and have missed the sweet spot of opportunity.

Given all of this activity, it is curious that there aren’t more transactions coming to fruition. It’s curious, that is, until one takes a look at the motivation driving each of these entities, and then it becomes clear that there is a significant disconnect between those who want out and those who might be interested in acquiring or merging entities. In many cases, the potential sellers have visions of valuations of their practices or centers that are more reflective of the levels seen at the height of the Wall Street deal boom. With current valuations hovering somewhere in the low single-digit multiples of EBITDA, sellers are in sticker shock that their hard-built practices are not worth more to potential buyers.

Deal or no deal, the reality check that many in the I-just-want-out club face is that acquirers do not share their views of the value of the entity, and are not likely to be persuaded by anything other than a forward-looking, predictable stream of revenue and profitability. Therein lies the true dilemma. Another significant indicator of a mature market is less predictable revenue/income. Reduced predictability means lower multiples on earnings and lower resulting valuations. Lower multiples mean frustrated sellers who feel that all of their hard work in building the business is undervalued.

Where is the bailout, you ask? As reimbursement rates continue their free fall and payors look to imaging providers to carry the lion’s share of cost reductions as part of the new Medicare Physician Fee Schedule, it is clear that the only relief to be found for embattled imaging organizations is in their ability to move forward based on reinvention and innovation.

As businesses learn to adapt to their new market realities, one of the strongest predictors of their ability to succeed in a mature or maturing market is their ability to adapt, change, and reinvent themselves. Today’s medical imaging practices now have that opportunity, and those able to look beyond lamenting the passing of the good old days of double-digit annual growth just might find that there is still plenty of opportunity for smart providers.

It is time for creativity and for an honest evaluation of the practice’s abilities in the face of a newly complex and unforgiving marketplace. Can you rally the radiologists to be the true representatives of a unique brand? Can you offer world-class customer service? Can you work more efficiently? Can you envision, develop, and build a center of excellence that physicians, payors, and patients would see as unique and dynamic? Can you align, motivate, and inspire your staff to achieve