| Seth Henry is the Founder and President of Arcadia Solutions in Burlington, MA. Arcadia Solutions is a healthcare consulting company providing services in the payer, provider and corporate markets, focusing on three areas of expertise: Healthcare Payer solutions, Healthcare provider Solutions, and Consulting Services.
What's your background, and how did you get started?
I got a Masters Degree in Environmental Engineering when no one was hiring
Environmental Engineers, so I took a job as a programmer. I started with a company that went public and along the way discovered that I liked the services side of things. After that I went with another start-up called CBridge Internet, which also went public. I soon realized that developing custom Java solutions was not that efficient and that the market was moving to packages, so I joined a division of a company doing services around Siebel. It was at that time that I asked myself, why am I working for other people? With a partner, we raised some venture money and we did a CRM start-up called Watch Hill Partners. After awhile I asked myself again, why am I doing all this work for the venture capital guys, why don't I bootstrap something? So, we sold Watch Hill Partners in 2003 to MasterCard Advisors and started Arcadia Solutions that year.
How has Arcadia Solutions been doing over the last few years in this economy?
We're now in our eighth year, and this quarter we'll break the $20MM run rate. We made a hard decision about two and a half years ago to bet the business on a healthcare vertical. We believed the market we had been in, a systems integrator in a niche category, was pretty finite and we could only take it so far. We knew we had to make a move in some direction and we believed that the go big or go home move was healthcare. We weren't sure if we were willing to make this move self-funded, so we decided to sell the company, which we did in 2007 to the technology division of the Pohlad Group in Minnesota. We believed we needed deeper pockets to do the risky things that would benefit us in the long-term. We made that move when we were a $9MM business and now we're going to $20MM in less than three years . . . in a pretty tough economy.
What's your view on the industry over the next few years?
Actually, I am not as optimistic as others may be about the broad IT services industry. I see the industry facing some big issues in the commoditization of technology, we have a real problem in where we procure the professional talent we need, and I see an imminent cash crunch where spending and profits continue to lag.
I think that the generalist IT services firms are going to have a hard time and they're going to feel enormous price pressure from globalization. The first gig I was billed out for in 1995, as a basic programmer, was $250, and today I see that work, basically a programmer for rent, going out the door in double digits.
As regards healthcare, this segment of the market is enjoying a rates surge right now from a supply and demand condition. We've got regulatory issues driving this, along with a surplus of money on the street, which is creating a temporary shortage of skilled labor. I think this will prove to be a temporary phenomenon, and the market will adapt pretty fast.
I think the firms that want to thrive in the long haul, in any category, need to start blending intellectual property and leverage into the services business. And, I think you're going to see more service ware companies that can combine data, services and proprietary thinking into bundled packages toward results and outcomes.
I do not think anyone is going to get rich in the skilled people for hire business for a long, long, time. The things I'd be watching are the global and US labor markets and unemployment. Until we reach a level of low unemployment and some advantage to working locally, I think you are going to get continued rate pressure … and this is a single digit margin business. Going forward, smart companies are going to have a strategy that says we have to bake in differentiation and IP; we have a true results differentiation or we've got to live with 6 percent EBITDA.
What does the M&A market look like in your segment and for you in particular?
It seems everybody is looking to buy a healthcare technology firm right now. It's something that a lot of companies didn't have as a vertical, and now they're playing catch-up. I think M&A is going to be an interesting play in the next couple of years because there is a lot of pressure to change the way you do business.
What I think this means is that you're going to see more strategy buys. Firms that have something special are going to get a premium, and they're going to be in demand. Tactical acquisitions, land grabs, revenue buys are going to trade at the lower end of the multiples. I mean, a $20MM generalist with low margins is going to get 5 times EBITDA while a $10MM specialist that has really figured out the game is going to get 3 time sales.
We've looked hard at being the acquirer, and the hard part for us has been there's a lot of tactical companies with too high of an expectation of what they're worth, and there aren't many strategic companies in our space.
What advice would you offer those thinking of an M&A?
I think most M&A situations that go bad are due to the intangibles. In my experience, people place way too much on multiples of earnings or growth projections, and not enough on the "what ifs," or the strength of the culture, or the quality of the leadership in driving growth going forward. My whole experience on the sell side and the buy side is that there seems to be a lack of creativity about how you go about valuing a company.
Think about it. A consulting firm, a service firm, has few physical assets. They have a bunch of people. So, how do you tell me that you know that consulting firms trade at a range of x or y, when the outcomes from these acquisitions range from shut it down in a year to 100 percent plus annual growth and profitability? What I think people fail to think about is, what is the cause and effect for performance in these businesses? Say I'm going out to buy a $1MM EBITDA services firm. The key question should be which one is capable of going to $50MM and why? Not which one can I get for $8 MM or which one can I get for $6MM.
I think that the companies that do good acquisitions will pay cash. The people who do distress deals and try to squeeze something out of them will back-end the deal. There's no free lunch. The companies that are performing well right now will command very good prices and they'll get good terms. And, they will get high growth and high margins. So, I think this market completely favors a strategy buyer and a cash buyer.
You may contact Seth at shenry@arcadiasolutions.com or visit Arcadia Solutions at www.arcadiasolutions.com. |
