That didn’t take long. On the same day Kelso and Stone Point did the PMSI-Stone River deal, giant PE firm KKR bought Mitchell International for $1.1 billion.
The transaction, reported to value Mitchell at 11-12 times adjusted earnings (no word on if that was trailing or forecast), was not as lucrative as some expected.
Mitchell, along with Stratacare, Medata, Xerox, and MCMC are the leading providers of bill review software to the work comp industry. Traditionally focused on auto claims software, Mitchell added work comp with its acquisition of CompReview several years back. The foray into comp was not without its challenges, particularly staff turnover, product glitches and some customers’ concern about responsiveness particularly around fee schedule updates. That said they did add several customers over the last few years, customers who seem generally satisfied with their performance.
There’s an interesting question yet to be addressed; does it make sense for KKR to keep the work comp AND auto software businesses?
A superficial analysis might lead one to think there’s synergy here; the same customer sector (P&C insurance), and similar issues and functions (process medical bills, deal with regulatory issues, integrate with treasury, medical management, and networks (albeit rare in auto).
In reality, I don’t see much in the way of synergy. The folks who run PIP and commercial auto at P&C insurers are quite separate and distinct from the work comp operators, making it unlikely one would influence another’s systems decisions. Second, auto is very different from comp – comp has indemnity, auto has property and liability; auto has medical limits and little in the way of medical management, comp has no limits and lots of med management; comp is functionality focused while auto is not.
And auto is a much bigger business than work comp bill review.
Competitor Stratacare has been rumored to be on the block for some months now; sources indicate Coventry’s work comp folks spent several days on-site earlier this year evaluating the software and operations. At some point Coventry will have to invest in its aging and creaky BR 4.0 platform, either that or kill the thing and switch customers to another application. That reality may well have been behind the on-site visit. If Coventry does not buy Stratacare, and I’d bet they don’t, there’s an argument to be made that splitting off Mitchell’s SmartAdviser platform (their work comp business) and merging it with Stratacare makes a great deal of sense.
There have been rumors that Mitchell attempted to merge with its largest competitor in the auto claims software business at least once in recently, a merger that may well have run into regulatory obstacles. A Stratacare-Smart Adviser “combination” would have no such problems, would generate a lot of cash for KKR, and would consolidate a business that needs consolidation.
What does this mean for you?
1. The expectations for Mitchell were likely too high; An 11x multiple is, by any standard, quite rich. Why the owners thought they’d get a 14x is puzzling. Perhaps they thought the feeding frenzy in work comp deals would generate a bidding war…alas this is primarily an auto company.
2. Watch this closely. KKR’s next few moves will tell much about their plans for workers’ comp.
