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Your software vendor may have been recently purchased by a private equity firm – Does it matter?


Caitlin Sattler - May 4, 2017 - 0 comments

As a pharmacist and business owner, it’s important that your pharmacy is united with like-minded partners who believe in success, growth, and independence. As you invest in technology to innovate your pharmacy, you’re doing more than a simple transaction; you are building a team, aligning your business with another company’s standards, and allowing them into the store you have strived to build.

With that in mind, when someone on your team struggles, it can have a profound effect on your pharmacy. As this team member looks for ways to avoid flatlining, it may turn to a private equity firm as a lifeline – both for business coaching and cash to keep them afloat.

Private equity is like venture capital in that both invest money and management expertise into companies and, in return, receive a stake in the business. That means the power of decision-making belongs to the private equity firm as it works to make the company profitable until it decides to sell the equity back to the company or on the open market. Dr. Harvey Rubin, a professor of economics and finance at LSU Shreveport, goes into more detail. “There are these investors that are called ‘private equity’ or ‘vulture capitalists’ who take a failing company, turn it around, and sell it for profit. Failing companies turn to private equity because it’s the only way they can get any money,” says Dr. Rubin. “Usually, the banks and lending institutions, especially with the passage of the new regulations, make it very hard to lend money to a struggling organization because the chances of that organization failing are pretty high. So the only source that failing organization can turn to is private people who are willing to put up the money.” Trying to re-energize a business is not a bad thing, but as the PE firm makes calculated decisions for its own gain, the focus of business decision may shift.

When one of your team members announces a new “merger” or “acquisition” (aka private equity), they may not be obligated to inform you, the customer, of the details but will most likely highlight the positive impacts that may occur. However, they may fail to educate you about the potential downfalls of relying on private equity to save an already-declining company.

Control

Although the company may still be led by its original management (who may also have a minority share of private stock), they are now owned and ultimately controlled by the PE firm, which has bought out the company with the goal of quickly making it profitable and selling it. Sometimes, PE firms find it necessary to make cuts to company staffing to increase their profit return, according to CNBC’s Mark Koba. “Private equity investors often replace senior management, reduce the workforce and sell off assets – and essentially gut the company for profit,” says Koba. When decision-making is left in the hands of profit-seeking investors or replacement leadership who are managing a drastically-reduced staff, the original long-term vision of the company is sacrificed to short-term profits. That vision should be centered around satisfied, successful pharmacists but may be ignored in the quest for higher profits.

Customer neglect

Private equity investors are probably not industry professionals and may be unfamiliar with the day-to-day operations of a pharmacy. One of the most important aspects of a company is its customers. As the PE firm works to make the company lean again through whatever means they deem necessary, the customers’ needs are often overlooked. Harvard Business Review cites Wesley-Jessen, a manufacturer of specialty contact lenses, as a company that suffered from an investor’s critical error. Bain Capital looked to expand into standard lenses and ignored Wesley-Jessen’s source of success: the optometrists. Within five years, Bain Capital’s errors “reduced the company to an operating loss and a perilous cash position.” Successful customers make for a successful company, and companies rely on their products to retain customers.

Drastic product changes

As the customer, the company’s product or service was obviously a major selling point when you first chose them. However, the PE firm’s need for profit might lead to negative changes in important aspects of the product or service, such as cost. The price of your product may increase to boost profits. Investors also benefit from merging similar companies. “Mergers of products or services could significantly reduce or eliminate those of most interest to a particular customer segment,” Richard P. Husler states in “Private Equity Investment in the Information Industry: Customer Benefit or Concern?” He continues, “Pricing structures could significantly change, and with that, much higher prices for those same products and services could be put in place.” An unexpected rise in technology costs could be a blow to your pharmacy’s profits (not to mention the strain that DIR fees are putting on your reimbursements).

 

The issue of private equity may not seem relatable to a pharmacist’s daily operations, but if those operations include key technology, pharmacists may have cause for concern. Lately, PE firms have targeted technology vendors; tech companies made up 19% of the private equity buyouts in 2016, as reported by Bloomberg.com. According to Rani Molla and Shira Ovide, “PE firms are seizing opportunities to buy a stable of relatively young tech companies in related sectors, combine them, and hack their spending to improve profits. For example, Vista cobbled together a company called Kibo from three e-commerce software firms it had bought.” It’s important to examine why one of your tech partners has been bought out by a private equity firm. Dr. Rubin comments, “If your business is failing, you have to be honest with yourself. Why are you failing?” These days, technology companies are more at risk of becoming obsolete. Outdated software and automation tools that still look and perform the way they did five years ago must shift their focus to innovation.

“Should customers be concerned? It depends,” says Rubin. “It depends on the company that’s taking them over: the management, the financial condition, the direction that company is going. Every case is different.” As these investors do whatever is necessary to build their profitability, what about your profitability? Pharmacists rely on technology to make their workflow smarter, faster, and more lucrative. Don’t allow your tech vendor’s failures lead to your own. If one or more of your partners can’t keep up with innovation, it may be time to start shopping around.

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