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October 27, 2008

Merger Madness
By Linda Sullivan
For The Record
Vol. 20 No. 22 P. 8

When I hear the term mergers and acquisitions, the first thing that comes to mind is the 1988 film Working Girl and the scene where Melanie Griffith’s character tries to persuade her radio conglomerate bosses to purchase a string of family-owned TV stations. At the time, I was more focused on Harrison Ford than the concept behind mergers and acquisitions. The working girl had to really sell the idea because it wasn’t clear whether the purchaser would realize the value of a related but ancillary business. At no time during the discussions was thought given to the company’s ability to maintain a superior product once the acquisition occurred.

As it so happens, the medical transcription industry is currently experiencing a slew of mergers and acquisitions—in fact, it has been for quite some time and I expect it to continue. Because they operate on a recurring revenue cycle, medical transcription companies remain an attractive buying option. The majority of business models requires that new customers be consistently identified and “sold,” thereby constantly feeding the revenue pipeline. I don’t know if there are statistics available on the average length of the relationship between a medical transcription service organization (MTSO) and a client—I would estimate about eight years—but generally, it’s fairly long if a company has been in business for any length of time and has a low rate of client turnover.

The recurring revenue cycle is attractive if a company wants to grow by acquisition. It means the gross revenue and profit from the previous year can be a fairly good predictor of what revenue will be for at least the next year and possibly several more.

The very nature of business is that if you’re not growing, you’re getting smaller. Medical transcription is generally a great business model and, if you are a large company and organic growth opportunities are limited, acquisition can be the next best thing. Banks like looking at MTSO balance sheets—the profit is reasonable and the cash flow is excellent—with the rare exception that hospitals and clinics pay their bills on time.
Enhanced delivery of patient care should be the goal not only of all healthcare facilities but all of their vendors as well, including medical transcription companies. Is the delivery of quality patient care enhanced in an atmosphere of consolidation? That is difficult to quantify.

While all acquisitions have the intended goal of increasing gross revenue and profit, some are driven by a roll-up mentality—the desire to purchase solid companies to increase the size of the organization. Other mergers are motivated by a desire to purchase technology.
Recently, the industry saw two of its biggest acquisitions ever when CBaySystems bought a majority interest in MedQuist and Nuance spent a tidy $363 million to obtain eScription.

In one type of roll-up acquisition, the bigger guy is swallowing its smaller counterpart. On occasion, this type of transaction fails. At the recent Inc. 500 conference in Washington, D.C., Jim Collins, author of Good to Great: Why Some Companies Make the Leap ... and Others Don’t and Built to Last: Successful Habits of Visionary Companies, said, “The merger of two mediocre companies does not take a company from good to great.”

In another scenario, the smaller company may have been run by its original owner, who started the business years before and grew it to a certain size. Along the way, deep, trusting relationships became the norm between the owner and the clients. When a multinational conglomerate purchases a smaller company and the owner is not retained in some capacity, those deep relationships are a thing of the past and very likely aren’t a thing of the future. The CEO is oftentimes not even in the same office as the transcription support staff, which may be composed of some of the same people who worked in the smaller office but who are now working for a new boss with a different leadership style and vision.

While the big money acquisitions garner the headlines, less-expensive maneuvering is flying under the radar. In a recent conversation with the owner of a smaller MTSO (approximately $1 million in sales annually), real concerns were expressed about what effect all this wheeling and dealing will have on the more modest organizations.

What small company owners can take hope in is that while both large and small services are judged on the core competencies (quality, price, and turnaround time), small services do seem to have a leg up in the area of customer service. Perhaps that is because the distance between the owner and the client is much shorter. Day-to-day issues that annoy the HIM support staff may never reach the ears of the CEO of a multinational conglomerate, while the head of a smaller company is often more accessible.
However, once a company is acquired, what happens? There have been many studies done on the success, or lack thereof, of mergers and acquisitions. The anecdotal figure I’ve heard is that two thirds do not succeed. When the acquisition is within the same industry, the success rate is higher. What does this mean for transcriptionists, HIM departments, and, ultimately, patients?
For the work-at-home transcriptionist, an ownership change can happen with little or no notice. Company culture is every bit as important in a decentralized organization as it is in the traditional office environment, and perhaps more so. Company cultures vary greatly. The purchaser’s priorities and management style often are different from the company being purchased. For transcriptionists, the acquisition of their employer can mean a period of adjustment at best or a trip to the unemployment line at worst.

On a day-to-day basis, does the acquisition of its outsourcing transcription partner affect an HIM department? Probably not at first, but if the company culture is not the same, the effects will eventually filter down to the HIM support staff. For example, will a smaller but highly successful transcription company that is bought by a large service still provide the same level of customer service? Perhaps that’s a question only the HIM staff can answer.

During a recent conversation with one of our clients, I asked whether that company gave any thought to what an acquisition of any of its vendors would mean to them. In response, I received an e-mail explaining that when contracts were renegotiated the next time around, the following clause would be added: “No party may assign any of its rights under this agreement, voluntarily or involuntarily, whether by merger, consolidation, dissolution, operation of law, or any other manner, without the written consent of the other party.”

I have to believe we are going to see more of this type of contractual requirement.
In the midst of a rapidly changing and consolidating industry, is patient care enhanced or diminished? A study on this question might reveal some interesting results. It’s implied in Working Girl that the deal eventually got done. It would be interesting to know whether the family-run television stations would have continued to operate as efficiently and cost-effectively once they were absorbed by the large conglomerate.

— Linda Sullivan is president of New England Medical Transcription, Inc. She was also a founding coordinator and first president of the Pine Tree Chapter of Maine, an Association for Healthcare Documentation Integrity chapter, and a past president of the New England Association of Medical Transcription.