Let’s be clear and put it in Music City terms: The band never came close to breaking up.
On Nov. 16, 2010, Joey Jacobs and the rest of the executive team that had run Psychiatric Solutions until the day before were in Chicago to meet with investors about their next venture. Universal Health Services had paid more than $3 billion to buy Psych Solutions, beating out bids from several private-equity firms. The deal paid $41 million to Jacobs and another $36 million and change to COO Ron Fincher and executive vice president Brent Turner, Chris Howard and Jack Polson.
But the sale was more bitter than sweet for the executives, who had been looking for a move under the umbrella of a private-equity buyer that would have kept them on to right the ship at Psych Solutions. That the company had even made it to the auction block was due to a combination of factors that included some patient care incidents resulting in bad PR and lawsuits as well as an October 2009 earnings miss that left the company’s stock with lackluster prospects for the following year.
In short, there was work left to do and the quintet was going to do it together. In March of 2011, Jacobs announced that the he and the four others have pumped $20 million into Acadia Healthcare, a six-year-old Georgia company that ran six treatment facilities.
“The industry still needed consolidation,” Jacobs says. “And we had something to rally around.”
So did plenty of other people. Today, three-quarters of the people at Acadia’s headquarters in Cool Springs are veterans of Psych Solutions. Jacobs, 60, says the team has taken what it learned in its previous venture and “compressed 10 years into three.”
The numbers support his point. By last fall, less than three years after the Jacobs team took over, Acadia had grown revenues to an annual run rate of about $720 million. It had taken Psych Solutions eight and a half years to get to that size. And Acadia is a good bit more profitable: Its total facility EBITDA margin through three quarters of 2013 was 24.2 percent, almost seven points higher than Psych Solutions’ number in the fall of 2005.
Crucial to that fast ramping up has been the core executive team’s history with each. Of the five Psych Solutions veterans who traveled to Chicago four Novembers ago, only CFO Polson has moved on. (He retired in 2012 after grooming former Emdeon exec David Duckworth to take his place.) The trust between Jacobs and Turner or Fincher — “a master in finding, placing and building talent” at the facility level — is instinctive by now.
“We’re at the point where we know what the others are thinking before they say it,” says Jacobs.
That matters in an industry like behavioral health care, where there are no shortcuts and a successful night for Acadia means waking up to no incident reports on the company’s 3,400 inpatients. In today’s hi-tech society, Jacobs says his team’s front-line technology consists only of caregivers and medicine. That makes it all the more important to be decisive when necessary — whether that means replacing a facility CEO not making the grade or signing off on capital projects while on a site visit. Jacobs constantly preaches urgency in action, an approach he says he learned and honed during his more than two decades at HCA.
“If you make a bad decision, that’s OK. We’ll know pretty soon if it’s a bad decision,” he says. “But it’s better than not making a decision at all. That just frustrates people.”
Sticking to the system
Jacobs has long been making lots of decisions in the acquisition arena. He and Acadia’s leaders have acquired more than 150 facilities during their careers and pretty much have their integration process down to a science. When a purchase closes, an operations group swoops in, led by a team of about 10 quality and compliance experts. Soon after, Acadia managers help transition the new holding to a standardized system for reporting incidents, hook it into the HealthTrust group purchasing network and sync up staffing and financial operations. On top of that come HMS clinical software systems from fellow Franklin-based company MedHost, which Jacobs says his team can “probably install better than HMS can” when it comes to psych facilities.
Thirty days after closing, 80 percent of the integration work is done. That allows facility CEOs and Acadia’s leaders to focus on boosting its profitability by adding new programs or emphasizing more lucrative acute-care business. Avondale Partners analyst Kevin Campbell says the company can grow its margins by 60 basis points both this year and next, which should help sustain its sky-high valuation.
But Acadia is not a one-dimensional roll-up story, a consolidator in a fractured part of the health care landscape like so many other companies Nashville has produced over the years. Like Psych Solutions before it, Acadia comes with an organic growth element. In 2013, the company wrapped up construction projects that added 300 beds to facilities it already owned. That was an increase of some 7 percent and up from 281 in 2012 and 76 in 2011.
Plans for this year and next call for the addition of a similar number of beds — a monthly staple of Jacobs’ calendar is a review of pipeline projects — and the promise of a hefty checkbook dedicated to expansion is one of the biggest attractions Acadia brings to prospective sellers.
The one-two growth strategy has lured investors eager to put their money in a pure behavioral health play and willing to bet on the Jacobs team. In November of 2011, Acadia became a public company thanks to the acquisition of a Massachusetts operator. Its shares began changing hands around $9 but had topped $20 a year later. They breached $50 this past January, giving Acadia a market capitalization of $2.5 billion — 125 times the investment Jacobs and his lieutenants made in March of 2011 and the equivalent of creating about $70 million of shareholder value each month.
“Investors have come to realize that we’re probably the only team in this sector that can pull this off,” Jacobs says.
The big number
And the remaining opportunities for Jacobs and his team are legion. Combined, the adult and youth behavioral markets are each worth more than $10 billion and growing around 2.5 percent annually. On top of that, the rise in awareness of mental health issues and the difficulty in cutting federal funding for treatment — if anything, the momentum in D.C. is headed in a positive direction — means the industry pie will grow further.
Jacobs wants to get more than his fair share before he bows out. He has set his eye on growing Acadia to $2 billion in revenues by the end of 2017, triple the trailing 12-month number through Q3 of last year. That will require more M&A than organic growth and it will mean avoiding the stumbles that put Psych Solutions in play more than four years ago. But Jacobs says he draws some of his motivation from proving wrong those who think Psych Solutions was a flash in the pan, the right idea at the right time.
“There’s no shame at all in admitting that proving the doubters wrong is what partly drives you,” Jacobs says. “I think we’ve found a sweet spot [...] We look forward to going out to play the next game.”
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