EyeWorld is the official news magazine of the American Society of Cataract & Refractive Surgery.
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EW NEWS & OPINION 18 August 2014 by J.C. Noreika, MD, MBA master. Earnings per share expectations can be unrelenting." And cash? Always king until the taxman cometh. So, who wins? "The people who financially engineer these deals make an enormous amount of money," said investment banker Patrick Hurley. Since the acquisition universe is finite, growth must eventually be generated from bought practices. Called same-store sales, it is the undoing of many roll-ups. The key? Get in—and out—early. During the feverish 1990s, Geoffrey R. Brooks of the Wharton School wrote "it's the greater-fool theory. At some point it has to stop, and some- one is left holding the bag." Maybe things are different now. Maybe consolidation can generate integration. Maybe doctors can work under a corporate yoke. Maybe op- erational efficiencies can be realized. Maybe today's buyers are strategic, not opportunistic. Maybe. Remember old number 8 in pin- stripes? As succinct as Santayana was eloquent, Yogi observed, "it's like déjà vu all over again." I couldn't say it better. EW Editors' note: Dr. Noreika has practiced ophthalmology in Medina, Ohio, since 1983. He has been a member of ASCRS for more than 30 years. Contact information Noreika: JCNMD@aol.com portion of the acquisition. In 1995, the prime interest rate was 9%. Today's rates are more attractive. Private equity investors are a source of funds for acquisitions. Novamed morphed into an ambu- latory surgery center company and was sold in 2011 for $214 million; this included assumption of $105 million in debt. It is now owned by a subsidiary of H.I.G. Capital LLC. Narayan Chowdhury, a partner and Chartered Financial Analyst for Franklin Park Associates of Phila- delphia, reports that private equity investors work windows of about 5 years. "Investments are expected to yield an annual return at a premium over the market. The premium can be substantial depending on the risk involved." Private equity may take a position on the governing board, a potential minefield when it comes to profit vs. patient care. When a sale or initial public offering is realized, private equity sells its stake and moves on to the next deal. For smaller transactions, accredited investors called "angels" may fund start-ups. Currently, the Security and Exchange Commission is scrutinizing rules under which angels operate. The stock market? Stark warns that Wall Street has little patience and a long memory. "The market can be more forgiving than private equity because it is accustomed to ups and downs but it is a tough task- learn from each other, a laboratory for best practices. Practice owners convert highly illiquid, depreciating assets such as furniture and equip- ment into cash while maintaining shareholder equity to profit as the company grows. But, Stark cautions he hasn't seen a physician roll-up work. There's a problem with doc- tors. They are the practice; the way they roll, so rolls the practice. PRG bought many successful practices. Most were working at 110% capacity and had no room to grow. Sharing risk with anonymous investors, doctors didn't work as hard. The lure of "the beach" was strong. Growth presents opportunity but too much growth too soon produces conflict involving autonomy, governance, and practice culture. So, why consolidate? Stark said that most physicians were looking for an exit strategy. "Follow the money," made famous in the 1976 movie All the President's Men, turned out to be a screenplay fabrication. "Deep Throat" never uttered those words. But the line is apropos to roll-ups. The acquiring company con- summates deals using both cash and stock. Purchasing accounts receiv- able, cash on hand, and most im- portantly, future cash flow generates greenbacks. The rest is borrowed. If future cash flow appears promising, a lending institution might finance a G eorge Santayana wasn't the first to observe that those who fail to remem- ber history are condemned to repeat it. But Kurt Vonnegut had the last word: "I've got news for Mr. Santayana: We're doomed to repeat the past no matter what. That's what it is to be alive." There is a rumbling within ophthalmology to embrace "big is best" by raising the Lazarushian concept of practice roll-ups. In June 1995, I was one of 10 founders, a board member and initial share- holder in the Physicians Resource Group (NYSE: PRG). Its peak mar- ket capitalization was more than $350 million. I witnessed its "poof" inception from the floor of the New York Stock Exchange. By 1997, PRG owned and allegedly managed more than 175 vision care practices na- tionwide. Upon its 2001 bankruptcy, I represented physicians' interests in a Dallas courtroom. Enough street cred? Let's review the Cliffs Notes on roll-ups. Their godfather, Wayne Huizenga, is best remembered for Blockbuster Video. He created the merger construct by combining garbage truck businesses, taking the result public. Ta-dah! Waste Management Inc. Stock valuation fueled growth; aggregation promised economies of scale and superior management; and the sale created liquidity and equity for the acquired company's ownership. The Gulfstream-IV was within reach. Wall Street embraced this hon- eypot. Everything from ambulance and bus companies to funeral homes and flower wholesalers were consoli- dated. For a while, it worked. Mike Stark, founder of Stark & Knoll LLC in Akron, Ohio, provid- ed legal advice in more than 50 roll-ups. He counseled ophthalmol- ogists joining PRG and Novamed Inc. (NASDAQ: NOVA). "The idea is appealing. The consolidator admin- isters the back office, information systems, and executive functions like strategic planning and growth and the doctors can practice med- icine." The consolidated clinics The Titanic's lifeboats were an exit strategy Insights J.C. Noreika, MD, MBA