News and Articles

Posted on: 8/22/17
For the Record Magazine

As a merger and acquisition advisor focused on the clinical documentation and revenue cycle management spaces, I speak often with those business owners and executives. A recent topic of discussion has been the disruption to the coding industry caused by the transition to ICD-10. The consensus is that it was similar to Y2K when business built to a crescendo and then tapered off fairly quickly. At the peak of the ICD-10 transition crescendo, health care service providers were dual coding, coders were learning ICD-10, demand for coding services was high, prices for those services were escalating, and there was a shortage of experienced coders.

Read the entire article as published in For The Record Magazine (pdf).

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Posted on: 3/22/17
Revenue Cylcle merged with Coding Strategies

March 20, 2017, Cherry Hill, NJ  — Suender M&A Advisors is pleased to announce the successful closing of the merger of its client Coding Strategies Inc. with a business unit of Revenue Cycle, Inc. Suender M&A initiated the transaction and acted as financial advisor to Coding Strategies, Inc. Terms of the transaction are not being disclosed.

Founded in Atlanta in 1998 by Melody Mulaik and Cindy Parman, Coding Strategies provides consulting expertise and educational tools for the healthcare industry. Revenue Cycle (Austin, TX) specializes in the business aspects of medical and radiation oncology, including operations and oncology coding and reimbursement.

Melody Mulaik, President of the newly combined companies said, “Suender M&A Advisors provided exceptional advice and guidance from start to finish. John Suender was our trusted advisor each step of the way – from preliminary diligence preparing us for a potential transaction, through the even handed negotiation of complex business terms with various suitors and finally the entire closing process. His years of transaction, financial and legal experience, together with his very practical perspective, were critical to us.”

"Since I co-founded the company almost 20 years ago, Coding Strategies has been dedicated to empowering healthcare professionals," said Ms. Mulaik. "Our nationally certified consultants, along with our comprehensive selection of training options, help our clients protect the financial health of their business, stay compliant, and find solutions to their toughest challenges."

"Our alliance with Coding Strategies is a perfect fit," stated Ron DiGiaimo, CEO of Revenue Cycle. "Coding Strategies will add even more depth to our service offerings and I am thrilled that Melody is staying as President of the combined companies and Cindy as Executive Vice President. Their expertise and educational services align with those we already have in place, and their track record of success speaks for itself." Mr. DiGiaimo will now serve as the Chairman of the Board for Coding Strategies and CEO of the combined companies.

Suender M&A provides merger and acquisition advisory services primarily to providers of outsourced health information management and revenue cycle management services, staffing services and other outsourced services.

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Posted on: 11/20/12

March 2, 2015, Cherry Hill, NJ.—Suender M&A Advisors is pleased to announce the successful closing of the sale of Omni Diagnostics to TTG Omni, LLC on January 31, 2015.   Suender M&A initiated the transaction and acted as financial advisor to Omni Diagnostics.  Terms of the transaction are not being disclosed.

Omni Diagnostics is a market leader in providing “in office” nuclear cardiology procedures in Greater Philadelphia and Southern New Jersey. 

TTG Omni is an affiliate of The Tomayko Group from Pittsburgh, PA, a vertically integrated collection of companies that offers the best in diagnostic imaging services, clinical staffing, pharmaceutical products and corporate wellness programs.

Suender M&A provides merger and acquisition advisory services primarily to providers of outsourced health information management and revenue cycle management services, staffing services and other outsourced services.

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Posted on: 11/20/12
MxSecure

November 16, 2012. Phoenix, AZ . — Suender M&A Advisors is pleased to announce the successful closing of the sale of MxSecure's medical transcription business to M*Modal. Suender M&A initiated the transaction and acted as financial advisor to MxSecure. Terms of the transaction are not being disclosed.

"The clinical documentation industry continues to dramatically change," said Colin Christie, President and CEO of Phoenix based MxSecure. "We have been evolving with it by setting up production facilities in the Philippines, implementing back-end speech recognition and developing our own transcription platform and electronic health record system. Nevertheless, our board concluded that the industry dynamics were such that the best opportunity to preserve our business, employees and clients would be to merge with a larger competitor."

Colin added: "We engaged Suender M&A Advisors to conduct a discreet and confidential sale process while merger activity was still robust. The process was more difficult to navigate than we anticipated. Our Philippines presence and the retention of certain technology and the EHR business made our circumstances rather unique and complex. John Suender's experience, creativity and diverse skill set – transactional, legal, financial and operational – were invaluable and enabled us to achieve our goals with an outstanding buyer. John is not a business broker, but a trusted advisor who guided our company and its shareholders every step of the way."

About MxSecure, Inc. Since 2003, MxSecure has been helping medical practices to accurately create and share clinical records with solutions that are affordable, simple to use, and adaptable to the way physicians work.

About Suender M&A. Suender M&A provides merger and acquisition advisory services to medical transcription, medical coding and other health information management companies. Suender M&A has a 100% success rate in the last 3 years.

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Posted on: 07/09/12

On July 3, M*Modal announced that is was going to be acquired by One Equity Partners (OEP) for $1.1 billion ($14 per share). How will they accomplish that?

As a first step, M*Modal entered into a merger agreement with a company formed by OEP. OEP wants to own 100% of the shares or none of the shares. If you think about it, this is a little difficult to accomplish because M*Modal is a public company and has many shareholders dispersed all over the place. As a result, it is impractical to contact all of them, convince them to sell and get them to deliver their shares. There will be some stragglers, but a merger mops up the stragglers.

What happens in a merger is two entities become one. M*Modal is owned by its shareholders and the merger sub is owned by OEP. Upon completion of the merger, the shares of M*Modal will be cancelled and converted into the right to receive $14 cash (or appraisal rights for dissenters). OEP will continue to be the sole owner of the merger sub and thus will become 100% owner of the surviving entity, because all of the M*Modal shares will have been cancelled.

An issue, of course, is that M*Modal entered into the merger agreement and not its shareholders. The company cannot obligate the shareholders to sell if they do not want to sell. Right?

Well, sort of. The first step here is a tender offer in which OEP will offer to purchase shares for $14 cash. In the next week or so OEP and M*Modal will file separate documents with the SEC setting forth the terms of the tender offer and a lot of other information. These documents will be delivered to shareholders so that they can decide whether or not to tender (sell) their shares to OEP. If 90% of the shareholders agree to tender their shares, OEP can effect what is commonly known as a short form merger. This can be completed without shareholder approval. In reality, the threshold is much lower than 90% because of a clever mechanism called a "top up option." If the top up option is exercised, M*Modal must issue enough shares to increase OEP's ownership interest to over 90%. At that point, OEP can do a short form merger without shareholder approval.

Although it might sound a little coercive, a short from merger is actually very practical and reasonably protects shareholders. Keep in mind that most shareholders will tender their shares, which is the equivalent of voting for the merger. Moreover, shareholder approval will be obtained if required. In the end, without a merger, a tender offer for 100% of the shares would be very difficult and time consuming to accomplish. Shareholders who do not actually agree to tender their shares will still end up with a right to receive $14 in cash upon completion of the short form merger (they will not get shares in the surviving entity). If they do not want the $14, their sole recourse is what is known as "appraisal rights." Basically, that's the right to argue to a court that you should have gotten more, but not the right to continue ownership or stop the deal.

So, will this get the deal done? SAC Capital Group, M*Modal's largest shareholder, has agreed to tender all of its shares in the offering (about 31% of the outstanding shares). That's a really good head start. Additionally, OEP has offered what appears to be a pretty penny for the shares – at least pretty enough to get SAC Capital to tender. The $14 was an 8% premium over the closing price the day before the announcement, a 19% premium over the 180-day volume weighted average closing price and a 33.8% premium over the 52-week volume weighted average closing price. Although I have no opinion on the value of the shares or the offer, my guess is that very few shareholders will turn this offer down.

By the way, the surviving entity in this merger will be M*Modal. I know that sounds odd – the buyer disappears and the seller survives. That's another good thing about a merger, because a change in entities creates a potential host of legal issues that are nice to avoid. In the end, the only thing changing here will be the ownership. So when all is said and done - M*Modal and all of its customers and employees will still be here.

Again, in a week or so, One Equity Partners will file a tender offer statement on Schedule TO with the SEC and M*Modal will file a solicitation/recommendation statement on Schedule 14D-9 with the SEC. Among other things, these documents will detail the offer, how to tender shares and the rights of shareholders. If you are lucky enough to be a shareholder, make sure you take the time to read these documents because they will contain important information that you should read before making any decision.

John Suender, President Suender M&A Advisors, LLC john@suenderadvisors.com www.suenderadvisors.com

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Posted on: 05/30/12

May 30, 2012. Cherry Hill, NJ. — Suender M&A Advisors is pleased to announce the successful closing of the sale of US Transcription, Inc. Suender M&A initiated the transaction and acted as financial advisor to UST. Terms of the transaction are not being disclosed.

"Although we continued to do a great job for our clients, it was becoming more challenging to do so," said Chuck Westphal, Vice President of UST. "After much thought, we concluded that we should at least explore the possibility of selling the business and hired Suender M&A Advisors to conduct a confidential sale process. With 15 years in the industry and almost 60 MTSO closings under his belt, John Suender's contacts and relevant experience are second to none."

Corey Westphal, CEO of UST, added: "We were very pleased with the advice and guidance we received from Suender M&A. In addition to customary broker services, John Suender and his team provided expert negotiation, financial, integration, and communication counsel. John's industry and deal experience were invaluable to both sides and evidenced by his creative solutions to various challenging issues."

About US Transcription. U.S. Transcription, Inc. was founded in 1998. Dedicated to providing the highest quality transcription product in the world to both small and large organizations, UST is focused on building strong client relationships based on quality and attention to detail.

About Suender M&A. Suender M&A provides merger and acquisition advisory services to medical transcription, medical coding and other health information management companies.

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Posted on: 03/07/12

I just returned from 3 days at HIMSS 2012 where I witnessed all of the "latest and greatest" in health information. It reminded me that during the course of each year I speak and work with dozens of owners and executives of MTSO's and other health information management businesses ranging in size from less than $1 million in revenue to over $500 million. I have been doing this almost non-stop since 1994 when a little South Jersey company that I then worked for acquired Transcriptions, Ltd. At that time "TL" had about $30 million in annual revenue and was one of two "800 pound gorillas" in the medical transcription industry.

What has amazed me over the years is how the industry has survived all of the "insurmountable threats" that it has confronted. In 1994, people were asking why our company would invest in a medical transcription business. Didn't we know that voice recognition was going to render the business obsolete in just a matter of years, if not months? They were equally perplexed when we bought the other "800 pound gorilla" (The MRC Group) in 1998. Didn't we know that all of the transcription work was going overseas? Even back then, electronic medical record (EMR) sales people were telling their clients that they could eliminate all transcription costs if they only adopted their EMR.

Somehow the industry has survived. That little South Jersey company has since changed its name to M*Modal, been sold twice, merged with itself, moved to Nashville and is approaching $500 million in annual revenue. The way the industry has managed to survive is, in my opinion, pretty basic. MTSO's have always had a very powerful and important relationship with their clients. They understand their clients' clinical documentation needs and have been able to adapt their services in order to meet those needs at an acceptable price point.

For example, MTSO's use of backend speech with editors far exceeds clients' use of speech recognition technology. The large MTSO's have converted a significant majority of their workforce from traditional MT's to editors. In addition, few clients contract directly with overseas vendors, but all of the large MTSO's now own their own global workforce and process a substantial portion of their work overseas. Although this is an oversimplification, the industry has embraced these competitive threats and used them to improve productivity. That has allowed them to pass on the cost savings to clients while maintaining acceptable profit margins. They survived and their clients benefitted.

That leaves EMR's. Their adoption rate over the years was remarkably low considering the perceived benefits and antiquated record keeping systems. But EMR's were difficult to implement and the old guard resisted change. Today they are basically mandated by law and, in reality, a good idea for the advancement of healthcare and the containment of costs. In November 2011 almost $600 million in government incentives were paid out to health care providers who implemented EMR's. Has the industry finally come face to face with an obstacle that it cannot overcome?

At HIMSS 2012 one of the remarkable things I noticed was an apparent tone of cooperation between MTSO and EMR vendors. The MTSO's have accepted the fact that EMR's are here to stay. Importantly, capturing discrete data remains necessary for the improvement of healthcare delivery. The EMR vendors have also accepted the fact that MTSO's have a very important role to play when it comes to successful EMR adoption. By allowing physicians to use dictation to capture certain sections of the patient encounter, physician productivity is maintained and EMR adoption is accelerated. This helps healthcare providers achieve meaningful use of the EMR, which is a requirement for government incentive payments, and warrants the return on investment.

Again, MTSO's understand the needs of the client when it comes to clinical documentation. I like to analogize an EMR to a deflated basketball. It's of little use unless it is inflated - in this case with discrete data. MTSO's are, and always have been, experts at getting that done. They do it faster, better and cheaper than their clients. They understand the challenges that clients face every day when it comes to capturing clinical information and automating the work flow. Things are changing – but MTSO's are right at the pivot point with their clients and should be well positioned to continue to participate in clinical documentation capture and workflow. Of course, they have to be able to adapt to the change, but they have successfully done so in the past.

In my next e-mail, I will discuss some of the changes that MTSO owners should be considering in order to keep their business relevant.

John Suender, President
Suender M&A Advisors, LLC
john@suenderadvisors.com
www.suenderadvisors.com

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Posted on: 01/20/12

2011 was a very active year for mergers and acquisitions in the medical transcription industry. Suender M&A successfully represented five (5) sellers:

• ExecuScribe; • SPi Transcription; • JLG Medical; • All Type; and • DTS America.

The 2010 combined revenue of these 5 companies was approaching $50 million. The buyers included Transcend, MedQuist and Acusis. There were, of course, a handful of other significant transactions in 2011, the largest of which was Nuance's acquisition of WebMedx. Suffice to say that the market was efficient, including a mix of buyers and sellers in addition to the above.

Because of confidentiality, we cannot disclose sale prices and terms of these transactions other than DTS America. What we can say is that prices were reasonable as a multiple of adjusted EBITDA when compared to historic transactions in the industry and to business service companies in general. Of course, 2011 was a difficult business year for the industry and the entire economy. For that reason, if no other, pricing was perhaps a little on the lower end of reasonable, but still well within the acceptable range.

Perhaps revealing a future trend for the industry, there were several acquisitions of "clinical document management" businesses that were not traditional medical transcription companies, such as Transcend's acquisition of Salar and MedQuist's of M*Modal and Poiesis. The prices paid for these businesses are not comparable to what an MTSO could command, because they bring a new technology and line of business to the buyer that are expected to result in a substantial increase in future revenue. A service business (like an MTSO) is typically valued based upon its current book of business and expected cash flows from that book of business. However, a discounted cash flow valuation of a "technology" business often justifies a much higher purchase price because of the expected increase in future revenue.

Our clients in 2011 came up against the same headwinds that all MTSO owners are facing today, such as: (i) declining prices; (ii) speech recognition; (iii) offshore transcription and (iv) EMR's. Each of our clients considered the cost of reinventing their business in order to counteract these headwinds, but concluded those costs were too high for them in terms of both money and time. Moreover, they realized that the certainty of success was unknown. So they made the decision to sell, concluding that doing so allowed them to realize the current value of their business and let the buyer assume the risk of change. It was of considerable significance that they also concluded that this was best for the long term prospects of the business, its clients and employees.

The market in 2011 was very challenging and the future seems to be equally challenging. Maintaining the status quo is not an option and all MTSO owners need to be prepared to invest in change if they want to stay relevant. In my next e-mail, I will discuss some thoughts about obstacles facing the medical transcription, I mean, clinical documentation, industry.

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Posted on: 09/29/11

September 29, 2011. Cherry Hill, NJ. — Suender M&A Advisors is pleased to announce the successful closing of the sale of JLG Medical Transcription Services to MedQuist Inc. on September 15, 2011. Suender M&A initiated the transaction and acted as financial advisor to JLG Medical Transcription Services. Terms of the transaction are not being disclosed.

John Suender, President of Suender M&A Advisors stated that "The activity in the medical transcription space remains robust.  Buyers are interested because they hope to drive the margins of their merger partners higher by integrating them into their operating platforms and models.  Sellers, on the other hand, are increasingly challenged with declining client pricing while trying to deal with fundamental changes to the industry resulting from the ongoing shift to offshore production, voice recognition and electronic medical records.  It simply makes more sense to many sellers to find a partner that can offer their clients a higher level of technology and greater suite of products.  I believe that the large medical transcription companies enjoy a more substantial competitive edge right now than they have at any time in the 17 years I have been exposed to this industry."

About MedQuist. MedQuist is a leading provider of clinical narrative capture services, Speech Understanding™ technology from M*Modal and clinical documentation workflow. MedQuist's enterprise solutions – including mobile voice capture devices, speech recognition, Web-based workflow platforms and global network of medical editors – help healthcare facilities facilitate adoption of electronic health records (EHR), improve patient care, increase physician satisfaction and lower operational costs. For more information, please visit www.medquist.com.

About JLG Medical Transcription Services. JLG Medical Transcription Services has been providing innovative transcription efficiency and accuracy for 26 years. JLG started as a small regional transcription company and has grown into a well-regarded national provider.

About Suender M&A. Suender M&A provides merger and acquisition advisory services to medical transcription, medical coding and other health information management companies.  For more information, please visit www.suenderadvisors.com.

John Suender, President Suender M&A Advisors, LLC john@suenderadvisors.com www.suenderadvisors.com

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Posted on: 09/13/11

September 29, 2011. Cherry Hill, NJ. — Suender M&A Advisors is pleased to announce the successful closing of the sale of JLG Medical Transcription Services to MedQuist Inc. on September 15, 2011. Suender M&A initiated the transaction and acted as financial advisor to JLG Medical Transcription Services. Terms of the transaction are not being disclosed.

John Suender, President of Suender M&A Advisors stated that "The activity in the medical transcription space remains robust.  Buyers are interested because they hope to drive the margins of their merger partners higher by integrating them into their operating platforms and models.  Sellers, on the other hand, are increasingly challenged with declining client pricing while trying to deal with fundamental changes to the industry resulting from the ongoing shift to offshore production, voice recognition and electronic medical records.  It simply makes more sense to many sellers to find a partner that can offer their clients a higher level of technology and greater suite of products.  I believe that the large medical transcription companies enjoy a more substantial competitive edge right now than they have at any time in the 17 years I have been exposed to this industry."

About MedQuist. MedQuist is a leading provider of clinical narrative capture services, Speech Understanding™ technology from M*Modal and clinical documentation workflow. MedQuist's enterprise solutions – including mobile voice capture devices, speech recognition, Web-based workflow platforms and global network of medical editors – help healthcare facilities facilitate adoption of electronic health records (EHR), improve patient care, increase physician satisfaction and lower operational costs. For more information, please visit www.medquist.com.

About JLG Medical Transcription Services. JLG Medical Transcription Services has been providing innovative transcription efficiency and accuracy for 26 years. JLG started as a small regional transcription company and has grown into a well-regarded national provider.

About Suender M&A. Suender M&A provides merger and acquisition advisory services to medical transcription, medical coding and other health information management companies.  For more information, please visit www.suenderadvisors.com.

John Suender, President Suender M&A Advisors, LLC john@suenderadvisors.com www.suenderadvisors.com

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Posted on: 08/31/11

Suender M&A Advisors is pleased to announce that its client, SPi Global, has entered into a definitive agreement to sell its medical transcription business line assets to Acusis, LLC.

Suender M&A provides merger and acquisition advisory services to medical transcription, medical coding and other health information management companies.

SPi Global is a leading full-service BPO provider with offices and facilities across North America, Europe, and the Asia Pacific region. SPi Global has over 15,000 employees delivering a wide range of Knowledge Process and Customer Relationship Management solutions to diversified markets, including financial services, healthcare, legal, and publishing.

SPi Global is a wholly owned subsidiary of the Philippine Long Distance Telephone Company (PLDT), the leading telecommunications provider in the Philippines. PLDT is listed on the Philippine Stock Exchange (PSE: TEL), and its American Depository Shares are listed on the New York Stock Exchange (NYSE:PHI).

John Suender, President Suender M&A Advisors, LLC john@suenderadvisors.com www.suenderadvisors.com

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Posted on: 05/04/11

We are pleased to announce that Transcend Services, Inc. has completed the acquisition of DTS America, Inc. effective April 30, 2011. Founded in 1995, DTS is a medical transcription company that serves approximately 30 hospitals plus a number of clinics and surgery centers in 13 states and currently generates approximately $12 million of annual revenue. Transcend is a leading provider of clinical documentation services to the U.S. healthcare market. The purchase price was $9.5 million in cash.

Suender M&A Advisors, a provider of merger and acquisition advisory services to medical transcription, medical coding and other health information management companies throughout the United States, initiated the acquisition as an advisor to DTS.

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Posted on: 02/12/10

By now, you have probably heard that MedQuist is buying Spheris out of bankruptcy for $75 million cash. Not so fast - it's not that simple. MedQuist is the "stalking horse" in a "Section 363 sale" and may not ultimately be the successful bidder.

In this and subsequent e-mails I will explore this deal as it unfolds and discuss how a 363 sale works. Feel free to email me if you have any questions or would like to further discuss these topics.

What is a 363 Sale?

Section 363 of the US Bankruptcy Code allows the trustee in a bankruptcy to sell assets of the bankrupt debtor outside of the ordinary course of business. The process of a 363 sale itself is not very well defined in the Bankruptcy Code. Rather, it is a process that has evolved over the years and even varies by jurisdiction. Regardless, it has become a very practical and effective tool for achieving a primary goal of any Chapter 11 filing - quickly permitting a bankrupt company to separate its past debt problems from its future business prospects - so that the business can continue to service clients, employ people, pay taxes etc.

Generally speaking, this is achieved pursuant to a court supervised process designed to assure that the business is sold to the highest and best bidder. The process is typically initiated when the trustee enters into a purchase agreement with a "stalking horse" - in this case, MedQuist. Next, the court approves detailed "bid procedures" for conducting what amounts to a public (but somewhat exclusive) auction of the business. In the meantime, "qualified" interested bidders sign non-disclosure agreements, perform limited due diligence and mark up the stalking horse purchase agreement to reflect their competing bids.

As currently proposed for court approval, qualified bidders would have to submit a binding offer within 30 days after court approval of the bid procedures. Although this might sound like a short time frame if you are trying to attract bidders, the court must weigh that against a desire to complete the sale and emerge quickly from bankruptcy. Ultimately, subject to court approval, the highest and best offer is selected to purchase the bankrupt business in what is akin to a live auction process. After final court approval of the winning bid, the parties proceed to closing. Did you know that Chrysler and General Motors were recently sold in 363 sales?

Did you know that MedQuist bought Lernout & Hauspie's transcription division in 2001 in a 363 sale? Did you know that MedQuist was not the stalking horse in that deal?

Why a 363 Sale?

In a nutshell, a 363 sale allows the business to be sold free and clear of liens and encumbrances and without having to go through the time and pain associated with the Chapter 11 plan confirmation process. It's pretty fast - and bankruptcy clean!

Although this is an oversimplification, a debtor will often pursue a 363 sale after it concludes that (i) the stigma of filing for bankruptcy is outweighed by the advantages of a 363 sale, and (ii) the speed of a 363 sale outweighs the greater flexibility that a purchaser might achieve through the more cumbersome plan confirmation process. This is a complicated decision. The debtor must consider how a bankruptcy filing will impact its creditors, clients and employees and will normally prefer to avoid a bankruptcy filing if it is practical to do so. The debtor will consult with its legal and financial advisors, and may consult with the prospective stalking horse bidders. Available cash and cash flow are also of critical importance.

As currently structured, the successful bidder for Spheris will take the business free and clear of, among other liabilities, Spheris' $75 million of senior debt and $125 million (plus interest) of subordinated bond debt. In addition, the shortened time in bankruptcy helps the company to focus on delivering service to its clients.

What is a "stalking horse bidder"?

The "stalking horse" in a 363 Sale is the initial bidder for the bankrupt business, setting the minimum price, kicking off the auction process and generating interest in bidding for the bankrupt company.   The "stalking horse" plays an important and scrutinized role in the 363 Sale.

Use of the term "stalking horse" is really a misnomer.  Merriam Webster Dictionary defines a "stalking horse" as "a horse or a figure like a horse behind which a hunter stalks game" or "something used to mask a purpose."    Apparently, hunters long ago learned that birds usually do not fly away when approached by an unmanned horse.  Hence, hunters would hide behind their horses and stalk their unsuspecting prey.   Both of these definitions conjure up connotations of "decoys," "shills" or "hidden agendas."

In a 363 Sale, the "stalking horse" is not a decoy or a shill.  They are bona fide bidders with the financial wherewithal to close the transaction.  Although there are private dealings prior to the announcement of the 363 Sale, the agenda after the filing is very public and pretty simple – sell the business to the highest and best bidder.  Sticking with the above analogy, the "stalking horse" might be more akin to a hunter standing in the middle of the field in plain sight "challenging" others to try to seize its recently captured prey.

Why would anyone be a "stalking horse"?

So why would anyone ever want to be a "stalking horse?"  The "stalking horse" must take the time, perform the diligence and spend the money to negotiate the terms of the initial bid.  There is no certainty in the outcome.  The bid is publicized in press releases and filed as a matter of public record in order to generate interest in bidding.  If no one bids against it, has it overpaid?  In other words, if the "stalking horse" underbids it might lose, but if wins in might have overpaid.

In order to encourage bidders to act as a "stalking horse," the 363 Sale process has evolved to give them certain advantages.  With respect to the sale of Spheris, some of these might include:

Paid to Lose - If MedQuist is outbid, they are entitled to a break up fee of $2.1 million and expense reimbursement of up to $375,000.

Time & Information - MedQuist signed a Non-Disclosure Agreement with Spheris several months ago, allowing it to do detailed due diligence similar to what you would expect in a transaction of this size and complexity. The bid procedures require interested bidders to submit competing bids by April 8, 2010 - not much time. There is little legal recourse against the bankrupt seller in a 363 Sale, so there can be a very large premium on knowing what you are getting into.

Defining the Prize – MedQuist has negotiated the terms and conditions of the purchase agreement, defining what assets will be purchased, what liabilities will be assumed and the conditions to closing. Having done its due diligence, MedQuist is probably pretty comfortable with the deal. Competing bidders, on the other hand, are essentially required to take the purchase agreement and literally "mark it up." Any changes to provisions other than the consideration (i.e., the price) can be challenged as being non-qualified, including conditions to closing. In part, competing bidders must hope that MedQuist did a good job of defining the prize.

Defining the Rules of the Game – MedQuist also had the opportunity to negotiate the bid procedures, which are essentially the rules of the game. MedQuist negotiated the timetable for submitting bids, the definition of a qualified bidder, the definition of a qualified bid, the minimum topping bid, the minimum incremental bid, requirements of deposit and serving as back up bidders, and, perhaps most significantly, the "break up fee" and expense reimbursement if MedQuist is not the winning bidder. Moreover, since MedQuist's offer has already been accepted subject to other topping bids, it is not necessarily subject to all of the same rules.

Backroom Dealings - MedQuist and Spheris have been talking for several months. I suspect they have made plans for approaching clients and employees and for integrating the businesses. Spheris management might know better where they stand if MedQuist is the successful bidder. Business dealings prior to the bankruptcy filing are perfectly legitimate and generally not subject to review by the bankruptcy court (unless they have an impact on the bankruptcy proceedings, such as bid procedures). Interestingly, CHA is a significant Spheris shareholder and (I presume) its largest client. Spheris and CHA reached a settlement back in December apparently regarding certain contractual rights of the parties relating to their relationships. Under the settlement, CHA agreed to extend the agreement through 2016 in exchange for better pricing and permitting Spheris to have access to $9 million of restricted cash. This agreement is presumptively a critical piece of any deal. It is conceivable that MedQuist played a direct or indirect role in that settlement, although that is pure speculation on my part.

Why would anyone be a "stalking horse"?

So why would anyone ever want to be a "stalking horse?" The "stalking horse" must take the time, perform the diligence and spend the money to negotiate the terms of the initial bid. There is no certainty in the outcome. The bid is publicized in press releases and filed as a matter of public record in order to generate interest in bidding. If no one bids against it, has it overpaid? In other words, if the "stalking horse" underbids it might lose, but if wins in might have overpaid.

In order to encourage bidders to act as a "stalking horse," the 363 Sale process has evolved to give them certain advantages. With respect to the sale of Spheris, some of these might include:

Paid to Lose - If MedQuist is outbid, they are entitled to a break up fee of $2.1 million and expense reimbursement of up to $375,000.

Time & Information - MedQuist signed a Non-Disclosure Agreement with Spheris several months ago, allowing it to do detailed due diligence similar to what you would expect in a transaction of this size and complexity.  The bid procedures require interested bidders to submit competing bids by April 8, 2010 - not much time.  There is little legal recourse against the bankrupt seller in a 363 Sale, so there can be a very large premium on knowing what you are getting into.

Defining the Prize - MedQuist has negotiated the terms and conditions of the purchase agreement, defining what assets will be purchased, what liabilities will be assumed and the conditions to closing.  Having done its due diligence, MedQuist is probably pretty comfortable with the deal.  Competing bidders, on the other hand, are essentially required to take the purchase agreement and literally "mark it up."  Any changes to provisions other than the consideration (i.e., the price) can be challenged as being non-qualified, including conditions to closing.  In part, competing bidders must hope that MedQuist did a good job of defining the prize.

Defining the Rules of the Game - MedQuist also had the opportunity to negotiate the bid procedures, which are essentially the rules of the game.  MedQuist negotiated the timetable for submitting bids, the definition of a qualified bidder, the definition of a qualified bid, the minimum topping bid, the minimum incremental bid, requirements of deposit and serving as back up bidders, and, perhaps most significantly, the "break up fee" and expense reimbursement if MedQuist is not the winning bidder.  Moreover, since MedQuist's offer has already been accepted subject to other topping bids, it is not necessarily subject to all of the same rules.

Backroom Dealings - MedQuist and Spheris have been talking for several months. I suspect they have made plans for approaching clients and employees and for integrating the businesses. Spheris management might know better where they stand if MedQuist is the successful bidder. Business dealings prior to the bankruptcy filing are perfectly legitimate and generally not subject to review by the bankruptcy court (unless they have an impact on the bankruptcy proceedings, such as bid procedures). Interestingly, CHA is a significant Spheris shareholder and (I presume) its largest client. Spheris and CHA reached a settlement back in December apparently regarding certain contractual rights of the parties relating to their relationships. Under the settlement, CHA agreed to extend the agreement through 2016 in exchange for better pricing and permitting Spheris to have access to $9 million of restricted cash. This agreement is presumptively a critical piece of any deal. It is conceivable that MedQuist played a direct or indirect role in that settlement, although that is pure speculation on my part.

Is the Winning Bidder already crowned?

So – does MedQuist have so many advantages that the outcome of the game is pretty much predetermined? Probably not. A well advised bidder capable of navigating the complicated bankruptcy rules and the 363 Sale process has many opportunities to out maneuver the "stalking horse." Some of these might include:

Low Cost Bid -  Just bid.  The cost of doing so is considerably less than the cost was to MedQuist to act as the "stalking horse" (recognizing MedQuist will be reimbursed if it is not the winning bidder).  A topping bidder will spend less money performing due diligence, negotiating the purchase agreement and the bid procedures and performing all of the other "pre-filing" maneuvering.  MedQuist kind of paved the way and a subsequent bidder can simply ride on its coattails.

Work with Unsecured Bondholders - If MedQuist's "stalking horse" bid is accepted, it appears that the unsecured bondholders will get $0.  A bidder could seek to become a junior bondholder or join with other bondholders and propose alternatives that would be acceptable to these other bondholders.  As creditors, the bondholders have standing to object to the entire 363 Sale process and, among other things, could seek to stop the 363 Sale in favor of a traditional Chapter 11 reorganization plan.  Moreover, even in the 363 Sale, the court's goal is to maximize the proceeds for the benefit of ALL of the creditors, so knowing how the junior creditors will react to a topping bid is important.

Make a Non-Conforming Bid.  Until the transaction actually closes and the assets are legally transferred, there is nothing stopping a potential buyer from making a bid that does not "conform" to the bid procedures.  Even though a non-conforming bid would not be qualified as part of the 363 Sale, the court could entertain it and even approve it if it were to conclude that it was in the best interests of the creditors.

What will happen in this case?

It is very difficult to predict what will happen without being privy to more information.  From an operating perspective, Spheris appears to be financially sound if the $200 million in debt is removed through bankruptcy ($75 million in senior debt and $125 million in junior bondholder debt).   Moreover, looking at what little financial information is available, MedQuist's $75 million cash offer seems low.  In addition, there is a $115 million net operating loss carry forward that has more value to some than to others.  Certain bidders will be better able to reduce overhead expenses than others, giving them an advantage over smaller companies and financial bidders.  Nuance has filed objections with the court regarding bid procedures and certain other matters, which seems to indicate that it is considering bidding.  Counsel for another large MTSO attended the hearing in which the bankruptcy court considered the bid procedures, which indicates some level of interest.

For these and other reasons, I would suspect that there will be topping bids from at least one and probably more other large MTSO's.  And, don't forget that there is a final auction when all of the qualified bidders will have the opportunity to top each others bids until a winner (subject to final court approval) emerges.

What happens next?

Over the last several weeks I have analyzed the Stalking Horse bidding process in the context of the Spheris bankruptcy sale in some detail. Now its time to have some fun and guess: (i) who will bid for Spheris, (ii) how bondholders might affect the outcome, (iii) what other wild cards might affect the bidding process, and (iv) what the final price might be. I emphasize that these are my educated guesses based upon public information and my 20 some years of transactional experience (i.e., my guesses might be way off, but it's still fun).

From an operating perspective, Spheris appears to be financially sound if the $200 million in debt is removed through bankruptcy ($75 million in senior debt and $125 million in junior bondholder debt). Moreover, looking at what little financial information is publicly available, MedQuist's $75 million cash offer seems low. Accordingly, I anticipate that others will bid for Spheris.

Who will bid for Spheris?

For starters, I think we can eliminate any category of bidder who is not already in the transcription business, including a private equity group that does not already own a platform company in the business. I say that because of the relatively short bidding process, the inability to do in depth due diligence and the inherent risks associated with purchasing a bankrupt company. A purchase out of bankruptcy is just a tough way to enter any business. More importantly, a large company that is already in the business will be better able to realize savings by reducing Spheris' overhead and other administrative costs than someone not in the business, which makes Spheris more valuable to them.

Next, to state the obvious, we can eliminate any potential bidder that cannot raise at least $75 million in cash. There are probably more potential bidders able to raise $75 million than most people would expect. Many of the mid-sized MTSO's are owned or controlled by private equity groups that would have the ability to raise that kind of cash.

So that means that the most likely bidders are other MTSO's who can afford to make a meaningful topping bid. Of course, MedQuist has already bid, and I suspect is prepared to raise that bid if necessary. Moreover, the publicly available Spheris bankruptcy records reveal that representatives of both Nuance and Transcend have shown interest by attending several hearings. Nuance has also filed bid objections.

Therefore, I think the most likely bidders to make it to the auction are MedQuist, Nuance and Transcend. The dark horses are any other MTSO's owned or controlled by private equity groups, such as WebMedX and OSI Transcription among others.

How bondholders might affect the outcome?

The real wild card in this whole process will be the bondholders (who are owed $125 million). MedQuist, perhaps cleverly, bid $75 million cash which was enough to get the senior lender to go along with the deal. However, it leaves the bondholders with exactly zero and perhaps feeling a little miffed. Since they are the next creditors in line to get paid if there is a topping bid, they are interested, important and potentially powerful.

Not surprisingly, the bondholders have hired an investment banking firm to advise them in connection with this transaction. A possible scenario is for bondholders to join with a bidder and offer to convert their debt into equity in the new company. For example, a winning bidder could offer $75 million in cash plus offer the junior bondholders $50 million of equity in the new entity. By doing that, the bondholders receive significantly more than nothing and the buyer does not need to raise any more cash. It is even plausible that the bondholders could work with any or all of the bidders encouraging them to bid up the price.

What other wild cards might affect the bidding process?

Another wild card is the fact that M-Modal and Oracle have both filed motions with the bankruptcy court objecting to Spheris' ability to transfer certain software licenses to the successful bidder. The license agreements apparently are not assignable to a buyer absent the consent of the licensor. And that is for good reason, because neither M-Modal nor Oracle want their intellectual property to end up in the hands of a competitor or even a third party that they do not know. This is a bit confounding because M-Modal or Oracle could withdraw their objections depending upon who the winning bidder is. Arguably, they might be able to veto the apparent winner or even influence Spheris to disqualify a bidder because of the anticipated objections. In the end, the bankruptcy court might approve the transfers despite the objections, resulting in appeals and filings for injunctive relief. This is an area where a business transaction begins to look like litigation and is filled with uncertain outcomes. This is also the type of potential problem that could cause some potential bidders to decide to just take a pass...

What will the final price be?

The topping bids are due on April 8. As a result of that process, the qualified bidders will be identified. All of the qualified bidders will then have an opportunity to attend a final auction on April 13 where they can bid against each other in an open forum where the winning bidder will emerge subject to final court approval.

The last financial information that Spheris filed with the SEC showed annual revenues of approximately $160 million and EBITDA* of almost $25 million. Although a company with Spheris' market share might ordinarily sell for a premium, this seems unlikely because of the bankruptcy. At the same time, it is the second largest MTSO and (after eliminating the interest bearing debt) appears to be profitable. Accordingly, assuming the year old numbers are still accurate, my guess is that the price will be in the range of three to six times EBITDA ($75 million to $150 million).

There are a variety of factors that can affect what bidders are willing to pay. Most obviously, the revenue and EBITDA numbers could be higher or lower than those set forth above. Moreover, a company that has filed bankruptcy often starts to lose clients. As a result, bidders are probably making assumptions about what the "bottom" is. On the up side, buyers are trying to estimate overhead expense savings that can be realized by combining two companies. Finally, there are the wild cards and the "terms" of payment, such as cash, equity, converted equity and even assumed debt.

My guess is that a reasonable price (after the auction) will be around $125 million. The price could go higher if payment terms are more generous to the buyer (i.e. less cash).

If you would like to e-mail me your guess, please do so.

*EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization. It is a rough measure of cash flow often used in valuing businesses.

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