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Lab/Pathology Merger & Acquisition Activity Not Likely to Slow

Record prices and a host of qualified, motivated buyers combined to make last week's mergers and acquisitions (M&A) conference at the 13^th Annual Executive War College on Lab and Pathology Management  a sizzler! Buyers, sellers and investors gathered at this first-ever lab industry event in Miami, Florida, to share the nuts and bolts of the M&A marketplace for clinical laboratories and anatomic pathology groups.

During the opening session, Doug Brown, Managing Director, Wachovia Securities, Charlotte, North Carolina, captured the audience's attention with an often revealing look at why buyers are willing to bid so aggressively to buy the most attractive clinical labs and anatomic pathology companies coming to market.

"For laboratory and pathology group owners' groups, the goal is to understand how different labs have been valued in the M&A and Public/Private Equity (P/PE) markets," Brown stated. "Understanding valuation is essential in order to take the steps necessary to maximize the value of your own laboratory company."

Brown presented an analysis of valuation by financial metrics according to market type-public equity market, M&A market, and PE market-from the perspective of "most relevant," "relevant," and "least relevant" multiples. "In the public equity market, the most relevant multiple is net income, factored together with expected growth rate," Brown stated. "The higher the growth rate, the higher the multiple. EBITDA is relevant, while the revenue multiple is least relevant for this market."

"M&A market valuation drivers tend to be more subjective," noted Brown. "For example, just knowing the valuation can be misleading, because undisclosed factors, such as synergies and potential up or down changes to revenue and EBITDA, can greatly affect the total purchase price a buyer will pay. Consolidators can present another variable, since this class of laboratory buyer is in a position to pay significantly higher multiples for a laboratory that fits its criteria.

"In today's laboratory M&A market, EBITDA represents the most relevant multiple. EBITDA is the metric for debt financing. Revenue multiples are relevant because they represent what a consolidator can earn on existing revenues. In this market, net income multiples are nearly irrelevant. Growth sustains higher M&A multiples," stated Brown. "Consolidators have seen a decrease in multiples, driven primarily by decreased long-term growth expectations."

For future sellers of laboratories, Brown stressed that private equity players use three primary factors in developing a valuation for a laboratory: 1) financial performance (revenue, EBITDA, growth); 2) strategic value (size, synergy, geography, specialization, managed care contracting, out-of-network revenue, ongoing role of existing management, customer concentration); and, 3) the overall situation in financial markets (timing, IPO markets, debt financing markets).

Brown offered four strategies for laboratory directors and pathologists looking to maximize the value of their labs and practices. First, understand current valuation trends in the various markets. Second, become intimately familiar with your current and projected financials. Third, establish credibility through a track record of delivering on projections. Finally, demonstrate the success of your business model.

A surprisingly large crowd turned out for this first Mergers & Acquisitions conference conducted by The Dark Report . Audio recordings of Doug Brown's presentation, along with the other presentations, panels, and expert sessions, can be purchased at http://www.executivewarcollege.com/2008/PDFs/08Audioorderform.pdf Order today to get the best and latest intelligence in the laboratory M&A market!

• 2008 Executive War College Audio Recordings (PDF)
  
• 2008 Executive War College Updated Agenda
  
• 2008 Executive War College Brochure (PDF)