CompReview Sold to San Diego Software Firm
A pair of Orange County entrepreneurs added fat strings of zeros to their net worth Tuesday as they sold their medical billing software company to a San Diego software firm in a stock deal that could top $200 million.
“We’re very excited,” said Lee Kaaren, co-founder of CompReview Inc. the Newport Beach company being acquired by HNC Software Inc. “This is a good step for us and for our employees.
Kaaren declined to comment further on the deal, which will make him and partner Michael Munayyer 20% owners of publicly traded HNC.
The San Diego company said it will acquire privately owned CompReview for 5 million shares of stock. HNC closed Tuesday at $42.13 a share in heavy Nasdaq market trading, up $4.25 on word of the deal.
The actual value of the acquisition will be based on HNC’s stock price when the sale closes in the fourth quarter but cannot fall below $130 million, said Raymond L. Thomas, HNC’s chief financial officer.
CompReview was founded in 1988 by Kaaren, a physician, and Munayyer, a workers’ compensation insurance executive. The company develops and markets software that enables insurance companies, businesses and medical billing firms to screen workers’ comp bills for fraud and compliance with various state regulations.
The company has 140 employees, most of them in Orange County. It is expected to earn about $5 million this year on sales of $24 million.
CompReview will operate as a separate unit of HNC and retain its name, Thomas said. The co-founders will remain with the company.
While HNC is paying approximately 41 times earnings for CompReview, based on Tuesday’s stock price, analysts said the deal is good for both companies and is not out of line with values in the insurance screening industry. HNC stock, for example, is trading at about 51 times the company’s earnings per share.
HNC, which posted a $6.4-million profit on sales of $54 million in 1996, is a major developer and marketer of software for screening credit purchases for fraud. About 10% of the company’s business is involved in medical billing, said industry analyst Barry W. Randall, of Dain Bosworth Inc. in Minneapolis.
The acquisition will boost medical billing to about 30% of HNC’s business, Thomas said.
HNC officials were introduced to Kaaren and Munayyer last year after the San Diego company acquired Newport Beach-based Risk Data Inc. for $61 million in stock. Risk Data develops software for managing and analyzing workers’ comp billing systems.
“They’ve been in informal conversations about putting the two companies together ever since then,” Randall said.
Negotiations became serious about six weeks ago Thomas added.
“It’s a very complementary acquisition,” said Randall. While workers’ comp and other medical billing systems are a small part of HNC’s overall business now, CompReview’s sales have been increasing at about 40% per year, Randall said, and there is no slowdown in sight.
Rapidly developing technology is spurring the growth.
“Not too long ago, all of the fraud checking had to be done by hand, so a lot of it just didn’t get done,” Randall said. “Now, with all the bills being digitized, it is possible to build software to automate the process, so every bill can be checked.”
Thomas said CompReview is “a very profitable company by software industry standards and it has a recurring revenue stream [because] it rents its software” instead of selling it. “That just adds to its value because there aren’t the ups and downs other software companies experience.”
CompReview’s products compare individual bills against standard billing formulas established for various regions of the country, red-flagging bills that stand out because they are much higher than the norm.
The company also makes software that checks workers’ comp medical bills against rapidly changing state laws and payment schedules, automatically adjusting the bills to comply with current laws and standards.
