An Interview with Reed Welch of Lane, Berry & Co.

This issue inaugurates a series of interviews with various participants in the health care M&A market. We will be talking with bankers, consultants, CEOs and others to get their insights on this robust market and its opportunities. Excerpts of a recent conversation we had with Reed Welch appear below. Reed is managing director and head of Lane, Berry & Co.’s Healthcare Services Investment Banking Group and has more than 13 years of investment banking experience. His primary area of expertise is in mergers and acquisitions and the valuation environment for health care services companies. He can be reached at rwelch@laneberry.com.

Sandy Steever: Reed, thanks for speaking to us and our readers. Lane, Berry & Co. is a relative newcomer on the investment banking scene. What sort of health care companies and sectors are you targeting as clients? What competitive advantage(s) does your firm bring to the table?

Reed Welch: Glad to be speaking with you. Each of my partners at Lane Berry came from one of the top investment banking firms on Wall Street (DLJ, Goldman, Citigroup, Morgan Stanley, etc). Fundamentally, we combine deep industry knowledge and sophisticated transaction expertise with a passionate commitment to out-service our competitors. Deals are always challenging – clients want their bankers to be experienced and actively engaged. Excuse the commercial, but we are really excited about what we are building at Lane Berry.

Within health care, we focus on medical devices and health care services. I head the firm’s health care services coverage which includes companies that provide outsourcing services and/or software solutions to Providers (hospitals and physicians) and Payors (plans, TPAs, and employers) to help these organizations manage health care more effectively, either clinically or financially.

SS: Your firm completed two significant health care services transactions this year, Metavante’s $151 million purchase of Med-i-Bank and McKesson’s acquisition of IntelliClaim, providing advice to the seller in each case. Could you comment on each deal, telling us why the company hired Lane Berry, why the seller wanted to sell and why the buyer wanted to buy?

RW: Both companies had reached the point where they had created significant value by building a next-generation technology and by establishing market presence: This was the year to partner with a third party which could help take the business to the next level. Med-i-Bank is a phenomenal growth company within the consumer-directed health care space—one of the more profitable and elegant business models that you will find. IntelliClaim offers next-generation, enhanced claims editing solutions to payors. McKesson has leading market share in the space and provided a great partner for IntelliClaim going forward. Both companies selected Lane Berry because of our senior-level commitment (active hands-on engagement by senior bankers) and our knowledge of their respective spaces.

SS: With these two deals, you appear to be favoring companies that provide business services to help manage the revenue cycle, streamline collections and claims adjudication, and automate billings. Do you foresee further M&A activity in this field in the near term? If so, who are the likely players going to be?

RW: No question there will be more activity. Providers want to submit claims more accurately and to be paid more quickly. Payors want to remove administrative costs which burden their claims processing activities and to pay claims accurately—nothing new there. However, technologies which facilitate such results are, increasingly, more effective. At the same time, large health care consolidators are looking to enhance their organic growth with acquisitions of growth companies which provide these new services and solutions. The consolidation players include established public companies, platforms within private equity firms, and, relatively speaking, new entrants into the health care space (like transaction processing companies). Companies are scrambling to provide more complete solutions to their clients—Per Se’s recent purchase of NDCHealth’s non-data businesses is a prime example of this.

SS: Metavante appears to have acquired Med-i-Bank to capitalize on the new opportunities opening up for health savings accounts, or HSAs. How much play do you think consumer-driven health care is going to see in the M&A market in the next year or two? Do you see it affecting companies beyond traditional payors?

RW: The consumer-directed health care (CDHD) space is one of the more interesting and exciting spaces right now. Already, a number of transactions have occurred and it is going to continue. One of the interesting aspects to CDHC is the number of new entrants it will bring into the health care services market—companies that want to manage funds, companies that can provide payment processing and account management, companies that can provide real-time claims adjudication and repricing, and companies that can educate a patient/member on how best to spend their health care dollars. The payors are an important piece of the CDHC plan development; however, the opportunity will touch many more participants.

SS: Buyers and sellers are naturally sensitive to valuations. Climbing out of the recession that reached bottom in 2003, we are seeing valuations in deals starting to rise in various sectors of the health care industry, such as home health and senior care. What is your take on these rising valuations and on what some see as an overheated market?

RW: Valuations are up versus two years ago reflecting the persistent, low cost of capital; the return of the corporate acquirer to the M&A market—more competition; and the availability of capital (the significant amount of private equity and VC money available for health care related companies). More interestingly, buyers are paying up for growth and profitable business models (predictable, recurring revenue and high incremental flow through profitability). I don’t believe the market is overheated. Returns will be lower on some acquisitions but, for most, still in excess of the overall cost of capital. And, for marginal growth businesses, buyers are still cautious…everyone is focused on growth and unit economics.

SS: A number of companies have recently made deals in anticipation of the Medicare Part D drug benefit, either by buying PPOs and extending their networks or by acquiring new business lines altogether, such as PBMs. How does all this buzz and activity affect the companies that you are working with? More generally, how do changes in government reimbursement, real or threatened, impact the kinds of health care companies you see involved in mergers and acquisitions?

RW: Government reimbursement has always been a watch-out within health care services. However, like anything there are two ways to look at it. Many areas, such as disease management, wellness management, home health, palliative care, etc., are presenting interesting opportunities to work with public payors on cost containment. Public payors are willing to reward service providers that can reduce costs with long-term contracts, thereby removing some of the risk around declines in reimbursement rates.

SS: This year, we’ve seen a fairly robust M&A market in the health care industry. Some of the general drivers of this activity include a company’s need for growth it may not be able to obtain organically, relatively low interest rates and the ready availability of capital. In your opinion, which of these factors (and any others you think important) will most influence mergers and acquisitions over the next three years?

RW: Difficult to pick one as each driver is related. Lower cost of capital (lower return expectation) begets higher valuation, which begets more M&A activity focused on growth. The health care industry presents strong, secular growth trends in many areas for the foreseeable future…

SS: And finally, is there anything else you think your readers would like to know?

RW: I would like you to know that Lane Berry is a growth company, which shares the same entrepreneurial culture of its clients. Accordingly, our firm has unique insight into the opportunities and challenges facing growth companies. Thanks for inviting me to speak with you. It is an exciting time in health care services whether you are a seller or a buyer…strategic opportunities abound.

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