On AMR, and Laidlaw - Part I

[Guest guest]

> Cross posted from EMED-L for information.

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> Denver Business Journal

>

> Monday -- March 22, 1999

>

> Tale of a troubled roll-up

> How AMR gobbled up 250 rivals to lead the pack

>

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> --

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> Aldo Svaldi Business Journal Staff Reporter

>

> American Medical Response ran with lights blazing and sirens wailing for

> most of the 1990s, buying and merging 250 mom-and-pop ambulance companies

> across the country.

>

> Today AMR is by far the nation's largest ambulance business with 23,000

> employees and 5,000 ambulances in 37 states. It responded to 5.5 million

> calls last year and reported revenue of $1 billion.

>

> But Aurora-based AMR also has become the latest corporate consolidation or

> " roll-up " to crash on America's corporate highway. Its weak condition

> threatens the future of Laidlaw Inc., the Canadian transportation giant

> that

> bought AMR just two years ago.

>

> AMR chief executive DeHuff resigned Feb. 23, just days before

> Laidlaw

> placed its ambulance division in intensive care. After losing important

> ambulance service contracts in major cities, Laidlaw dispatched its chief

> operating officer, Grainger, to restructure operations.

>

> In addition, Laidlaw will take a $250 million write-off on AMR, a

> staggering

> sum that equals more than 20 percent of the $1.12 billion in cash that

> Laidlaw paid for the company in 1997.

>

> For Laidlaw, whose stock plunged as word of problems at AMR spread, the

> stakes are high.

>

> " In any business that has been as quickly and rapidly consolidated as the

> ambulance industry, there were premiums paid that were not justified, "

> Grainger said.

>

> AMR accounted for about one-third of Laidlaw's $3.5 billion in revenues

> and

> the cash paid for the company represents the lion's share of the money

> Laidlaw got when it exited the waste-hauling business in the mid-1990s.

>

> In the case of AMR and Laidlaw, a failed roll-up is more than just a

> failed

> business proposition. Every day, the company's paramedics and their

> patients

> are putting their lives at risk.

>

> Interviews with experts inside and outside the ambulance business revealed

> the weaknesses in AMR's ambitious plan:

>

> Political tunnel vision. AMR and rival consolidators tried to impose a

> national model on a business that demands in-depth attention to local

> public

> safety regulations and the public officials who run safety agencies. Rules

> for response times, training and vehicle licensing vary from area to area,

> making it almost impossible to impose one national service standard on all

> markets. AMR developed a national brand name without an operating model to

> make money off it.

>

> Flawed cost-cutting schemes. Many industry roll-ups allow for a degree of

> local autonomy but consolidate so-called " back office " functions. In AMR's

> case, economies of scale in maintenance and equipment purchasing proved

> disappointing. At the same time, centralized billing centers worsened

> rather

> than improved uncollected debt, the industry's biggest problem. As long as

> it was growing through acquisitions, AMR could hide many of its problems.

> It

> has yet to prove that internal growth rates can be achieved without

> putting

> the public at risk. " I think we overestimated the potential economies of

> scale and the benefits of centralization, " said Mike Taigman, a Savanna,

> Ga.,-based industry consultant.

>

> Failure to lock up talent and long-term franchises. AMR needed to build on

> contracts to answer local 911 emergency calls if it wanted growth. But as

> complaints about service increased, local governments had easy remedies --

> they could do the job themselves or bring in a new provider. Talented

> industry pioneers who were bought out or let go by AMR remained connected

> to

> their communities and started a new wave of companies. This time, the

> mom-and-pops, not the consolidators, hold the upper hand in what some are

> describing as the industry's " deconsolidation. "

>

> Failure to anticipate rapid change in U.S. health care. Laidlaw's game

> plan

> counted on leveraging expertise in transportation and government

> contracting

> but it underestimated the need for health-care experience. Changing rules

> for federal reimbursement for Medicare and downward pressure from managed

> health plans cut into revenues, said Rester, retiring regional vice

> president of AMR's Southern Group. " The demand for transportation has not

> changed; the reimbursement has changed, " Grainger said.

>

> AMR isn't alone in its difficulties. The country's second-largest

> ambulance

> roll-up, Rural/Metro Corp., is on its third management team in four years

> and faces a lawsuit from shareholders angry after the company's stock

> dropped from above $36 to $6.12 a share.

>

> The difficulties of the ambulance consolidators carry an important lesson

> for others who hope to roll up service-intensive industries.

>

> " The bloom is off the rose in the consolidation industry, " said Jeff

> Hooke,

> a Washington, D.C., investment banker and author of a guide on mergers and

> acquisition.

>

> Hooke, once a big fan of AMR, still argues the ambulance industry can be

> successfully consolidated. But anyone who succeeds will have to find a way

> to deliver profits to Wall Street while convincing communities they're not

> being short-changed when lives are at stake.

>

> From fledgling to giant

> Not so very long ago, life was easier for ambulance company owners.

>

> Armed with a fistful of cash from venture capitalists and corporate

> backers,

> Massachusetts entrepreneur Verrochi, the founder of AMR, was on a

> tear.

>

> In August 1992, he combined four small ambulance operations and took AMR

> public, acquiring the currency he would need to fund a national company.

> Verrochi had the luxury of picking the best companies and luring them with

> promises of capital to fund the latest equipment and training.

>

> " If you ran a good operation, you had the opportunity to expand, " said

> AMR's

> Rester, who hitched his Mobile Medic Ambulance Service, Mississippi's

> largest provider, to AMR and stayed along for the ride.

>

> A typical acquisition had revenues of between $3 million and $5 million a

> year with the largest about $20 million, said Bob Forbuss, past president

> of

> American Ambulance Association and a former AMR employee.

>

> During the next five years, AMR integrated many of the top players in an

> industry with more than 2,000 providers. In 1995, Verrochi was Inc.

> Magazine's " Entrepreneur of the Year. "

>

> In Denver, AMR bought three companies in 1992, including Ambulance,

> the

> best-known operator. In 1995, lured in part by the opening of Denver

> International Airport, AMR moved its corporate headquarters from Boston to

> Aurora to put its widespread operations within easy reach.

>

>

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