Brent W. Lambert, MD, founder and CEO of Ambulatory Surgical Centers of America, has been noticing a new trend in recent years. Several small ambulatory surgery center companies with an equity stake in multiple ASCs have approached ASCOA, asking to be bought out.
"That would never have happened five years ago," says Dr. Lambert, whose larger ASC company has not taken up any of these offers, but is still interested. As of the beginning of the year, ASCOA had developed or turned around more than 60 ambulatory surgery centers.
"The smaller companies are looking to a bleak future," Dr. Lambert says. "The ASC industry is changing very rapidly and many of the smaller companies, even when they have an equity stake in their ASCs, see the handwriting on the wall."
Why small companies are selling
Dr. Lambert says smaller ASC companies, basically those with fewer than 12-15 ASCs, are beset with a number of challenges:
• Inadequate reimbursements. "CMS is unlikely to pay enough money to ASCs so that they can make a profit on Medicare," Dr. Lambert says. "ASC profit margins have been declining year after year. People are saying we want out of this environment." He says larger companies like ASCOA can weather the storm, but smaller ones feel the pain very deeply.
• Less access to financing. "Small companies have not been able to get financing to grow their portfolio of centers," Dr. Lambert says. "The tend to be viewed as a risk by the banks. The banks are asking, 'What are the prospects that they would be profitable if they did have the money?' "
• Declining interest from private equity funds. Although private equity funds have made some high-profile acquisitions of ASC companies, Dr. Lambert thinks the funds are losing interest because they are not seeing the kind of high returns they were used to in the past. "Virtually no equity funds are entering the ASC market for the first time and some funds are getting out of the ASC market," he says.
• Lack of economies of scale. "When you get to be a certain size in the market, you can become more efficient," Dr. Lambert says. For example, large companies like ASCOA have teams to help with key tasks like physician recruiting and contract negotiations that smaller companies cannot organize. ASCOA itself has a team of six analysts who work full time to gather data for contracting. And when ASCOA recently acquired a center, it assigned one person to do nothing but recruit more physicians over several months. This person brought in 13 new physicians who will be adding $7 million to the ASC's bottom line.
A string of recent ASC company acquisitions
As small companies yearn for a white knight, some of the larger ASC companies and equity funds are still willing to play the role –– picking through the small companies for great opportunities to make money in turnarounds, says Jon Vick, president of ASCs Inc. in Valley Center, Calif.
"Over the past decade, there has been a constant movement of small ASC companies into larger ASC companies," Mr. Vick says. "Private equity funds and other capital partners have had lots of money. As the market matures, there are opportunities to buy up failing centers."
This has been going on for some time, he says. But in the past nine months, several high-profile mergers have taken place:
• AmSurg Corp., which has 202 ASCs, is acquiring 18-center National Surgical Care for $173.5 million.
• United Surgical Partners International, with 165 ASCs, is purchasing 14-center HealthMark Partners for $32 million.
• H.I.G. Capital, a private equity fund working through 12-ASC Surgery Partners, is acquiring NovaMed for $109 million. NovaMed, with 40 ASCs, is much larger than Surgery Partners. But like the smaller companies, NovaMed is looking for capital and the opportunity for growth, Mr. Vick says.
• Irving Place Capital, another private equity fund, acquired 14-ASC National Surgical Hospitals. Irving Place is replacing National Surgical's previous owners, led by Ferrer Freeman & Company, Charlesbank Capital Partners and JPMorgan Asset Management.
Big players build on ready-made networks
The big players often seek out small companies rather than acquire individual centers one by one, Mr. Vick says. It's easier to buy a ready-made network, he says. The buyer doesn't have multiple closing costs and the acquisitions move faster. While it takes one year to acquire a center and two years to build a center from scratch, it takes six months or less to acquire a network or company that owns 10-20 centers, he says.
Mr. Vick thinks demand for small ASC companies has heated up. "There is a lot of competition these days to acquire smaller companies," he says. "It's a lot harder to acquire a company today because there are a dozen or so other companies who also want multi-center networks."
As larger companies search for good deals, some smaller companies intentionally develop strategies to make themselves more attractive for acquisition, Mr. Vick says. "Some companies offer stock options to physician partners so that when the company gets acquired, the stock options will be worth several times their face value and the physicians will benefit," he says.
Mr. Vick still sees a lot of activity in the private equity market. "Selling to private equity firms is a real opportunity for the founders of the company who put in sweat equity," he says. Private equity funds, he adds, are typically seeking an ASC management company with a minimum EBIDTA of $5 million-$10 million. That rules out many of the newly emerging ASC companies that have just a few centers. He says the private equity funds also want proven earnings on the books and are looking for an internal rate of return on their investment of at least 25 percent.
Warning: Mergers may erode physician-control
Mergers of ASC holdings may not always be a good thing for the original physician-investors. Mr. Vick cautions that one outcome of mergers is loss of physician control as the acquired ASC moves up the food chain of buyers. "When small companies are sold to larger owners, the physician-partners end up with less clout in many cases," he says. When the physicians sell off majority interest in their ASC to a small management company, they often have little control over the sale of that small company later on.
"The physicians may end up with a new partner that they’re not happy with," Mr. Vick warns. To avert this, he advises physicians to always retain a majority interest in their center and insist on participating in governance of the ASC company. "They should have seats on the board and require a super-majority approval for certain critical issues, such as a sale to a larger company," he says.
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