Mergers and Acquisitions: is Our Cottage Industry Going Corporate?
Posted Apr 28, 2011 in Management
Mergers and acquisitions are on the rise in the business world at large and our industry is no exception. In the past two years, three private equity firms have invested in dental laboratories and group laboratories have made a considerable number of acquisitions, with some of them being the largest purchases in our industry's history. How are these moves changing the marketplace? Here's what some of the major players in the field have to say.
There's been a flurry of merger and acquisition activity in our industry since the beginning of the new millennium. Click here for a timeline of mergers and acquisitions reported by LMT between 2000-2006. In 2001, when Andy and George Hites sold their second-generation laboratory, California-based MicroDental Laboratories, to a private equity firm, it was just the beginning of our cottage industry going corporate. In the past two years, three more private equity firms have entered our marketplace, providing funding for some very substantial laboratory acquisitions. Our mom and pop industry has clearly been discovered.
Why the sudden interest from the private sector? Financial potential is one reason. "The dental market represents one of the fastest growing segments in the medical technology industry. The dental laboratory industry is a primary beneficiary of the public's increasing interest in and willingness to pay for improved dental function and esthetics," says John Foster, chairman and managing director, HealthpointCapital, LLC. The private equity firm, focused exclusively on orthopedic and dental device businesses, acquired DTI Dental Technologies, Inc., a network of 16 laboratories in Canada and the U.S., in August 2006.
The fragmented nature of our industry and consequent consolidation opportunities also adds to the appeal to private equity firms. "Private equity firms see the potential to execute a 'roll up strategy.' The idea is to acquire a number of labs and roll them into one company to achieve economies of scale, improved profitability and critical mass. Then, the newly 'rolled up' company builds significant market share and eventually is sold to other investors/operators or taken public, which creates a large profit payoff for the consolidators," says Chuck Yenkner, who has more than 30 years of sales and marketing experience in the dental laboratory industry and is now the president of Business Development Associates, a Glastonbury, Connecticut-based consulting firm.
Investors are also attracted to our industry because of the rapidly shifting market conditions, including the influx of new technologies and growth of offshore competition. "The pace of technological change is accelerating and will greatly impact the manner in which services will be delivered in the future," says Harvey Shapiro, chairman of NovaDent. "The formation of NovaDent reflects our collective belief in the future of the dental lab industry." Backed by one of Canada's largest private equity fund operators, Birch Hill Equity Partners, NovaDent was created for the sole purpose of acquiring dental laboratories in North America. Its first acquisition was Issaquah, Washington-based Issaquah Dental Lab and Milling Center, whose former owners, Larry Searles and George Englund, are also partners in NovaDent. Soon after, the company acquired Totem Lake Laboratories in Seattle, Mirror Pond Dental Arts and Dahlin/Fernandez/Fritz Dental Laboratory, both located in Portland, Oregon.
From the seller's perspective, being acquired can address multiple goals. For the 48% of laboratory owners who are more than 55 years old and nearing retirement age, it can serve as a viable exit strategy as well as a way to ensure a secure future for their employees. Acquisition also provides an opportunity for growth. "NovaDent's buyout has provided funding for new technology. Right now we are researching digital impression-taking systems and investing in additional CAD/CAM technology. 'Mom and pop' operations can't afford the technology a lab now needs to keep up," says Michael White, general manager of Dahlin/Fernandez/Fritz Dental Laboratory.
Fred Walke, CEO and president of Dublin, California-based Micro-Dental Laboratories, agrees. "With the continued backing of Riverside Partners, we've expanded our market presence with the acquisition of Sunrise Dental Ceramics in Las Vegas and Becden Dental Laboratory in Draper, Utah. A good private equity sponsor can aid in a company's ability to grow," says Walke, who expects this trend to continue. "The interest of investors in the dental industry continues to gain momentum due to the strong, consistent, underlying growth characteristics. It is not uncommon that I am solicited by over five private equity companies a month, all claiming they have a buyer, seller or an interested party."
Influx of capital to fuel growth is also the main reason Dental Services Group (DSG), a network of 28 laboratories throughout the U.S., Mexico and Canada, formed a partnership and management-led buyout with the private equity firm Bolder Capital, LLC in December 2005. "Up to this point, acquisitions had not been a major focus of our business," says Robert Ditta, CDT, president and CEO of DSG. "We had a history of small acquisitions and fold-ins, but spent most of our time managing our locations. We realized, however, to remain a leader in the industry, we needed to develop financial resources to accelerate DSG's growth."
And grow they did. In August, DSG acquired Americus Dental Labs, Inc., a group of laboratories with seven locations and revenues in excess of $28 million--one of the largest laboratory acquisitions in recent years. Although maintaining its position as one of the largest lab groups was definitely a motivation for this acquisition, Ditta says that DSG also saw, "an opportunity for organic growth. Americus' ability to fabricate cosmetic and fixed restorations complimented DSG's strength in removables."
It's been a win-win situation, since the management at Americus also shares the same goal: profitable growth. "Labs are moving away from being craft-centered and toward being manufacturer-centered," says Richard Harrell, CDT, president of Americus-Clearwater. "This means the industry is becoming in part technology-driven, and that requires lots of money. DSG has a dynamic and aggressive growth strategy. Management of our two groups saw the acquisition as a natural marriage."
National Dentex (NDX), a publicly held network of 43 full service operations and five branch labs in the U.S. and Canada, has also made some substantial acquisitions recently: Green Dental Laboratory, a 200-person lab in Heber Springs, Arkansas in March 2005 and the Keller Group, Inc., which employs 185 people in two locations: Fenton, Missouri and Louisville, Kentucky, in the fall of 2006. According to David Brown, president and CEO, there has been a noticeable shift in the marketplace and interest in selling among the larger lab owners. "We were never against acquiring larger labs, there just weren't many for sale until recently as more and more of their owners are starting to think about exit strategies," says Brown.
For Josh Green, who started Green Dental Lab in 1980, selling to National Dentex gave him the opportunity to take the equity out of his company and continue working; he is now the executive vice president, laboratory operations, overseeing all National Dentex laboratories. He also wanted to make sure that he took care of his employees. "One of the most significant changes has been the wealth of opportunities available to my employees since becoming an NDX laboratory. In the past, we were always dependent upon ourselves. Now we have an entire family or network of laboratories to fall back on," says Green.
With the influx of private equity firms and growth in group and larger laboratories, how will all this merger and acquisition activity affect our industry?
It's certainly encouraging for the larger laboratory owners. "The influx of private equity firms has created an increased demand for laboratory acquisitions, especially those with revenues in excess of $3 million. Selling prices for laboratory businesses have never been higher, and seem poised to continue increasing, at least, for the short term," says Yenkner.
DSG's Ditta feels the interest among private equity firms bodes well for our future. "These firms research the market and know where they want to invest. Their interest is a real compliment to our industry. They're not interested in something that won't last," he says.
He predicts that, although we may see six to eight mega-lab groups in the future, merger and acquisitions activity won't change the industry to a significant degree. "Small labs--consisting of two or three employees--will always have their place. Even though they cannot offer all the technologies that their dentist-clients may ask for, they're developing relationships with larger labs that do have the technology. This allows small labs to offer a full range of services," says Ditta.
Others foresee an increase in small- to mid-sized lab mergers because it's an effective way for those labs to combat the threats posed by expensive technology and offshore production. "Growth gives you freedom to take advantage of the opportunities that come along, particularly in the area of technology," says Don Warden, president of Lord's Dental Studio, Inc., Green Bay, Wisconsin, which recently purchased nearby Twin City Dental Lab.
Harrell agrees, and points out more benefits of consolidation, including opportunities for better pay, benefits, educational programs and career advancement, which all contribute to recruiting and retaining good employees. "In my opinion, consolidation is the best thing for everyone in the industry, from the technician to the owner. I'm thrilled with this trend!"
Here We Grow Again: Groups With a History of Growth
Americus was formed in 1994 with the merger of three of the largest laboratories in New York: McAndrews-Northern Dental Lab in Queens, RestoraDent Laboratories in Manhattan, and Somar Dental Studios in Jamaica, NY. The company was acquired by DSG in 2006.
DTI Dental Technologies Inc. began as Total Management Services Inc. (TMSI) in Alberta, Canada in 1994. It started purchasing laboratories in 1996, was incorporated in 1997 and underwent a name change to DTI Dental Technologies Inc. in 1998. DTI then went public on the Canadian Venture Stock Exchange in July, 1999 (DTI-X) and was acquired by HealthpointCapital LLC last year.
National Dentex Corp. was founded in 1982 as H & M Laboratories Services, Inc., a Massachusetts corporation that acquired six full-service labs and branch labs from Healthco, Inc. In 1983, the company changed its name to National Dentex Corporation and acquired 20 additional labs and branches from Lifemark Corp. The company went public in 1993.
Dental Services Group got its start in 1989, when Robert Ditta, CDT; Joseph Gerace, CDT; George Obst; and Ojars Papedis led a management buyout of MedServ, which consisted of American Hospital, Ipco and Sybron. The group formed the Sentage Corporation, and began doing business as Dental Services Group. In 2005, Bolder Capital, LLC sponsored a management-led buyout of the company.
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