R Squared, MEDIQ Merger Heralds Powerhouse ISO

The largest medical imaging independent service organization is about to get larger. MMI, parent of ISO leader R Squared Scan Systems, launched a plan last month to purchase its main competitor, MEDIQ Equipment and Maintenance (MEMS), a subsidiary of health-care conglomerate MEDIQ.

If completed, the transaction would give R Squared a dominant position among medical imaging ISOs and improve its edge in competing with OEMs for equipment service contracts.

Under terms of the nonbinding letter of understanding, MMI of Corona, CA, would acquire MEMS and merge it into R Squared. MEDIQ of Pennsauken, NJ, would receive 2.2 million shares of MMI common stock, as well as warrants to purchase an additional 250,000 shares of common stock at an exercise price of $7.50 per share.

If the transaction is completed, MEDIQ would become a major shareholder in MMI, holding just over 38% of outstanding shares. The deal would increase MMI's annual revenues to over $60 million.

The merger should help MMI increase R Squared's profitability through improved economies of scale and reduced duplicative costs.

"It is a plus for MMI because it gives them the additional scale that they need," said John Cumming of WDI Capital Markets of Hilton Head, SC. "It will allow them to get rid of redundant positions and they should have less travel time. They should be able to cut their costs per unit of service."

The merged ISOs will also be able to leverage off each other's strengths, according to R Squared president Alan Margulis. MEMS has a strong capital asset management program that R Squared will be able to incorporate into its operations. On the other hand, R Squared is strong in used equipment sales, an area that MEMS has not entered.

"It is a significant opportunity to have additional lines of businesses, such as asset management, as well as increasing our size on the CT and MRI servicing side," Margulis said.

MEMS' position within MEDIQ has been questioned since the parent company launched a widescale effort three years ago to trim subsidiaries and sharpen its strategic focus. Among the core businesses that MEDIQ has maintained is MEDIQ Imaging Services, which provides shared diagnostic imaging services focused on low-cost imaging modalities, such as ultrasound and nuclear medicine (SCAN 6/16/93).

Merging MEMS into R Squared would create an ISO with service contracts for over 30 MRI scanners and 400 to 500 CT scanners. Both firms offer service for a similar stable of products: GE's 1.5-tesla Signa MR scanner and GE, Picker, Technicare and Siemens CT scanners.

The ISO's expanded size and improved geographic position--R Squared is centered on the West Coast while MEMS is strong in the Southeast--will increase its appeal to large customers such as managed-care organizations, according to Margulis. It will also heat up the ongoing battle between ISOs and OEMs for lucrative service dollars.

"We are going to demonstrate that the ISOs have the technical capability to compete effectively with the OEMs," Margulis said. "The fact that we deal with multiple brands should make it a more attractive product for managed-care organizations. We will have the capability to maintain everything they have."

The firms are in due diligence, and the merger will require shareholder approval before it can be completed, Margulis said. MMI is planning to close the deal in March.