What’s with all the M&A activity in work comp?

Up until this week, it looked like this fall M&A in the work comp services sector was going to be at an all-time high. Now, with Greece in default, the Euro in serious trouble, and markets looking for yet another bottom, things may slow down – or perhaps even stop.
While some would think foreign debt problems wouldn’t have much to do with whether a private equity firm or larger rival buys a company, there’s no question those kind of macro factors have a significant influence. Its not unusual for a merger or outright purchase to include substantial funding from debt as the buyers seek to leverage their equity investment. While this can make for even better returns for the buyer, it can also saddle the target company with a significant debt burden that can hurt cash flow, hinder investment, and drag down results.
Perhaps its folks trying to make a splash at the comp conference in Las Vegas in early November. It could be the expiration of the Bush tax cuts at the end of 2012 is driving owners to sell before Uncle Sam’s take increases. Competitive pressures are also a factor; some owners are likely seeing some of these deals (OneCall buying RayTel, STOPS, Express Dental; MSC’s purchase of Integrated Health, Sedgwick’s continual pursuit of complementary businesses) as the big getting bigger, and figure they better sell before they can no longer compete with rivals who far outweigh them.
More sophisticated sellers likely realize the uptick in claims frequency we saw last year produced a nice bump in claims (and therefore business volume), a bump that has, in all likelihood, disappeared as the structural decline in frequency resumes it’s 19 year long decline. Of course this only helps the frequency-driven businesses, and has little if any effect on sectors that are more affected by severity.
Then there’s the impact of regulatory changes, with Illinois leading the charge (for now); ongoing cost pressures on traditional work comp services; and let’s not forget the desire on the part of some investors to pull money off the table.
Remember private equity firms have a portfolio of investments – some are doing well, others so so, and still others have tanked. Their investors are expecting outsized returns, so occasionally a private equity company has to sell off one of its stars to balance a portfolio laden with underperformers.
Finally, it’s become apparent to me that the level of involvement with and depth of knowledge about the work comp services space has grown significantly within the investment community. Sure, there’s still a lot of noobs out there who don’t know a claim from a claim, but the folks who’ve spent some time in this business are getting pretty good at spotting trends and opportunities.
Expect to see a few more deals announced before, during, or just after, the Vegas comp conference.