Mergium has been collecting statistics of M&A transactions in this segment since 2017. The statistics include transactions with the following characteristics:
Types of deal structures:
Sale of 100% or more than 50% of shares or membership interests.
Sale of minority interests - a minority interest is an ownership stake in a practice that is less than 50%.
Equity private placements - a private placement is a sale of newly created shares to a limited pool of investors and institutions.
Practices offer mainly applied behavioral analysis (ABA), but we also include practices that offer ABA and/or some combination of other pediatric therapies such as occupational, physical, and speech therapies.
Most of these practices offer services primarily to kids and young adults to 21 years old or so.
Practices have different models including home, school, and community-based models. Payors included Medicaid, private insurance, and private pay.
It covers transactions in the 50 states and DC.
It does not include companies that offer only information technology solutions (such as digital platforms, software development, etc.) and not therapies directly to kids.
The following graph illustrates the number of transactions by type of buyer:
Sources: Mergium and SEC
The buyers in the graph above are:
Private equity firms: These are transactions in which a private equity firm (“PE”) acquires 100% or majority interest in a practice. The purpose of these acquisitions are to expand the acquired company (“Platform”) through acquisitions of smaller practices, de novo locations, increase in the in-home services or services in the community. The statistics include secondary buyouts (SBOs) or sale of a practice by a PE to another PE.
Platforms of PEs: These are acquisitions done by PEs' acquired companies. These transactions are also known as “add-ons” or “tuck-ins”.
Strategic Investors: These are acquisitions of practices done by a company that is not a PE nor a Platform of a PE. The buyer is a player in the autism services segment as well.
Private placement investors: These are acquisition of shares by private investors when a company sells new issued shares. These transactions are regulated by the U.S. Securities and Exchange Commission under Regulation D.
There are three very distinctive periods:
2017-2019: Increase trend in numbers of transactions: Increase of almost 200%.
2020-2022: Plateau or sustained number of transactions of about 40 per year.
2023: Decrease in activity.
The mergers and acquisitions activity has been driven by PEs through direct acquisition and/or through their Platform practices. This increase in M&A activity was due to: (1) the increasing prevalence of autism due to greater awareness and broadened diagnosis criteria; (2) the timing of state autism insurance laws requiring coverage of autism services by commercial and state employment benefit plans; (3) the clarification in 2014 by the Centers for Medicare and Medicaid Services (CMS) that ABA is a covered benefit; (4) the mandate as of 2014 by ACA that all marketplace health insurance plans include autism; (5) coverage of ABA services by the federal Employee Health Benefit, Tricare, and many self-funded employer plans regulated by ERISA; and (6) the high fragmentation of the segment and the potential for scalation and consolidation.
It should be noticed that several providers went the route of private placements to sell new issued shares to raise capital. The most active year for private placements was 2021. In 2023 we had 5 private placements which is in line with the annual number of private placements in the period 2020-2022.
During year 2023, M&A transactions fell about 40% when compared to 2022. This is not a decrease only in this segment, but it was similar to decreases in M&A transactions in behavioral health, healthcare services, and all industries in the US and around the world. That is, this situation is not unique to autism/ pediatric therapy services in the US. Several factors affected this trend:
Increase in interest rates:
Since private equity acquisitions are financed largely by debt, higher interest rates on loans increase the PE’s cost of capital. The PE’s internal rate of return and attractiveness of the investments decrease.
For the buyer, higher interest rates increase the cost of equity and thus of acquisitions.
Valuation: Since higher interest rates increase the cost of equity and of debt (both being the cost of capital), the targets valuation decrease. This produces a mismatch of price expectations between buyers and sellers, and transactions become more difficult to close. Given the relatively high valuation multiples in the last few years, buyers have had expectations of higher multiples than those of the current market conditions.
Increase in inflation and wages: Increase in inflation and high demand for services and therefore therapists have put pressure on staff wages. On the other hand, payor rates have remained largely flat and, therefore, practice profit margins tend to decrease. This produces downward pressure on practice valuations. Thus, the pool of good attractive targets for active buyers decreased.
Large providers have had challenges over the last months. These challenges are varied. There have been providers closing locations, having layoffs, leaving certain states, and even one entering chapter 11 and later sold in pieces.
We expect the number of transactions in 2024 and 2025 to increase when compared to 2023, because: (i) the expectation of lower interest rates and improvements in debt markets; (2) inflation getting closer to the Fed’s target, lower wage pressures, and stabilization of profit margins; (3) the soft landing of the economy; (4) increase in add-on transactions by current PE platforms, selling of financially struggling practices, and the expectation of some PE platforms sales.
Even though M&A activity decreased because of the macroeconomic situation and the economics of the segment, there are buyers interested in entering conversations with owners of practices thinking on an exit (sale). Some of the key characteristics of attractive targets are:
Good clinical outcomes.
Recognition in the community for providing quality services.
Stability or growing rate of revenues.
Sustainable and healthy financial margins.
Adjusted valuation expectations to the current macroeconomic situation.
Low staff turnover.
Stable or growing patient census.
Good training models and healthy learning environments.
Robust internal processes.
Strong information systems (financial, clinical, etc.).