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Is work comp still in investors’ sights?

After dozens of acquisitions, mergers, and buyouts over the last four years, there have been relatively few transactions of late.

This isn’t due to lack of interest on the part of investors, anything but.

No, private equity companies and big companies alike are still on the lookout for potential deals, scouting for assets that

  • are under-resourced,
  • have promising technology or business models or exemplary management,
  • can drive more revenue to specialty firms and/or suppliers, and/or
  • dominate increasingly narrow niches.

No, it isn’t lack of interest, but a combination of factors that have led to the seeming-slowdown in activity. Here are a few that come to mind…

  • fewer assets (companies) to buy.  With all the deals done over the last few years, there just aren’t as many companies in the space.
  • the assets that are left are bigger.  Private equity firms typically focus on specific segments – with one of the criteria being size.  As the supplier industry has consolidated, there are far fewer midsize companies around for the PE firms that specialize in that niche to pursue.
  • prices are really high.  A few years ago, a multiple of 7 times EBITDA (sometimes equated with cash flow) was considered good.  Now, that’s laughable. Two closely related issues here; 1) sellers focus on deals with really high multiples (10x for Genex, a case management company!!), know their baby is much more beautiful, and want more; and 2) PE firms – the smart ones – don’t want to overpay.
  • the more potential buyers understand work comp, the more they “get” the underlying growth issues.  The total work comp market is likely shrinking. Frequency continues its long-term structural decline.  The employment market is changing, and that change will accelerate over the next decade.  Unless an asset has a proven management team, is winning market share and growing organically (by selling more business, not acquiring other businesses) and has the “sustainable competitive advantage” the structural headwinds are tough to overcome.

That said, there are a couple niches that look promising.  

Work comp pharmacy is one; margins remain steady; the PBM industry has really upped its clinical and operational game; there’s still considerable growth opportunity within existing customers; and many PBMs have very solid management teams.

Small  companies that focus on a narrow niche are enjoying a lot of success, taking advantage of the failure by some of the now-huge service vendors to deliver even basic customer service.  MegaCorp’s strategy, dictated by its owners’ theoretical ideas about how combining this service with that vendor and this other distribution channel will allow them to get all of the ancillary business from every payer means it isn’t paying much attention (often, almost NO attention) to basic customer service.

With priority now given to growth and debt service and cost cutting, MegaCorp is ignoring such niceties as billing correctly, returning phone calls, providing updates on services, reporting outcomes, and integrating their various disparate operations, services, distribution channels and other acquisitions.

The result is the promise of an integrated service provider continues to be two years away, as it has been for the last decade.  Into the service gap have stepped entrepreneurs, many refugees from acquired companies, who get it.  They built their predecessor companies on service, high-touch, dedication to their clients and a deep understanding of what works and why and how.

They are building the next batch of companies that, even now, are attracting the interest of investors.

Expect there to be continued activity at the highest end of the market, and watch for investments by savvy firms helping fund these small companies as they look to grow their businesses. 


Joe Paduda is the principal of Health Strategy Associates



A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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