Consolidation Ahead: Imaging Mergers and Acquisitions
Over the past 10 years or so, there have been distinct phases in mergers and acquisitions in the medical imaging market. At the turn of the millennium, there was optimism about the state of the market, and consolidation was taking place at the volume that was to be expected, based on the conditions of the time. The amount of consolidation activity seen then seemed likely to continue to accelerate (out of the high single digits and into the double digits) as the use of medical imaging for diagnostic purposes grew, and particularly as the value of imaging in preventive medicine became more apparent. Both of these trends favoring higher imaging volumes were reinforced by the knowledge that the aging of the baby-boom generation would bring even more demand for imaging. Financial sponsors looked at the sector and became involved, feeling that the industry was ripe for consolidation. Several high-profile acquisitions were accompanied by escalating stock values. For one provider company, for example, stock prices increased 14% in 2000 and 103% in 2001. By the end of 2002, it was amazing to see how quickly the optimism in the market had shifted. The increased capacity that flowed from the decisions of equipment manufacturers to flood the market with magnets (offered at attractive financing levels) led to some operational problems in the major imaging companies. One company, for example, failed to meet expectations, while senior executives resigned at two other prominent companies. The confidence of the people who were buying assets quickly fell in response, and activity in mergers and acquisitions basically slowed down, with the exception of the completion of some transactions in progress. Even these transactions took place at prices, expressed as multiples of earnings before interest, taxes, depreciation, and amortization (EBITDA), that were lower than those seen previously in the same market. This depression in the mergers-and-acquisitions market for imaging lasted from 2002 through 2005; it was followed in February 2006 by still greater depression in the wake of the Deficit Reduction Act (DRA), which took a remarkable number of imaging companies by surprise. Even those companies that were otherwise in a position to undertake mergers and acquisitions were too busy trying to assess the impact of the DRA on their companies. At the same time, those companies considering selling their businesses still had higher EBITDA multiples in mind than the DRA (and other large-scale issues affecting the market) made it feasible for any buyer to offer. THE COMPETITIVE LANDSCAPE Of about 5,500 Medicare-certified imaging facilities in the United States, only a dozen or so chains hold more than 20 facilities each. The companies, taken together, operate at 700 locations, meaning that less than 15% of facilities belong to major companies. It is clear that this highly fragmented market needs consolidation. In most sectors of the health care industry, three to five companies control much higher percentages of the market. The pressure of overutilization is still operating in the market, and the DRA and utilization control (via radiology benefit managers, managed care companies, and accreditation standards) are dictating who will actually be reimbursed. These forces are having a real effect on small providers as the reality of how difficult the current operating market is slowly becomes apparent to them. They are not well capitalized, they don't have good market concentration, and they are not particularly willing to sell. The buyer range is narrow, with only a few companies in a position to acquire (and many companies likely to be for sale) over the next 6 to 18 months. In addition to recent large transaction such as those involving Alliance Imaging, Medquest, and the imaging division of HealthSouth, there have been many small acquisitions with only a few facilities (or even a single facility) as their targets. Overall, an increase in transactions is clearly in progress. Not all of these acquisitions are the traditional type, in which a large imaging company adds a smaller one to its assets. Health systems have been purchasing IDTFs, and buyers of several kinds have begun to acquire the imaging departments of physician practices. VALUATION LEVELS Multiples offered now will probably be three to five times the value of the previous 12 months' EBITDA. This has been stretched to six to seven times the EBITDA, but only in unusual cases. Going forward, as more and more assets come onto the market for just a handful of buyers, seeing anything above the EBITDA times five will be very unlikely. At the beginning of 2007, three new financial interests came into the market, acquiring ownership interests in imaging companies. They were particularly active during the last 6 months of 2007. Companies in a position to acquire assets are growing in the current competitive landscape. Stock prices for imaging companies have rebounded, outperforming other health care services to yield an overall growth of 293% since 2002. It is amazing that imaging, over the past 5 years, has been one of the best-performing sectors in health care, given the pressure under which the sector has been placed. This performance can be attributed to recent infusions of money from new private equity companies. On a historical basis, peak acquisition prices have mirrored stock prices in imaging as buyers looked at their own stock to determine how much they could spend on acquisitions. Because stocks are highly volatile, however, it is hard to draw meaningful data from them now. Nonetheless, imaging stock prices have been climbing to historic high levels over the past year, so public markets are supporting the sector. This alone will drive acquisitions, and the sector's fragmentation will put additional pressure on small providers to sell. Over the next 12 to 18 months, consolidation should increase significantly.