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By Greg Jaffe
Staff Reporter of The WALL STREET JOURNAL
NASHVILLE – For living proof that business success isn’t always a popularity contest, consider Josh Nemzoff.
In a career that has spanned eight employers in 20 years, the barrel-chested health-care consultant has berated colleagues and clients, and regularly infuriates bidders interested in the very hospitals he is paid to sell.
“Josh is an extremely talented individual,” says Donn Szaro, Mr. Nemzoff’s former boss at accounting firm Ernst & young. “He’s just always in your face.”
Still, Mr. Nemzoff has parlayed and at times charming, at times abrasive personality into a commanding position in the high-stakes game of hospital mergers sweeping the country. In the past two years, Mr. Nemzoff’s firm has brokered nearly $1 billion in deals, largely in his niche: helping nonprofit hospitals peddle themselves to big health-care companies on the open market.
Therein lies a striking paradox. In today’s health-care area, tiny firms such as five-person Nemzoff & Co. have become sought-after middlemen in deals involving such behemoths as Columbia/HCA Healthcare Corp. The small firms’ success comes largely at the expense of more established deal makers. Mr. Nemzoff’s firm has repeatedly stolen business away from such powerhouses as Merrill Lynch & Co. and Goldman, Sachs & Co.
Now the larger firms, which rarely focus on mergers involving nonprofits, are finding it difficult to adapt to deals in which getting top dollar can take a back seat to such issues as indigent care and employee benefits.
“Our problem has been that when you are dealing with nonprofits, your objectives aren’t as clear-cut as a for-profit securities deal,” says a Morgan Stanley executive who asked not be named. “And that has been very hard for the mergers-and-acquisition people at our firm to adjust to and understand.”
Indeed, Mr. Nemzoff has been able to take full advantage of the larger firms’ slowness to adjust. In Cookeville, Tenn., where the City Council began taking bids on the local hospital in March, Mr. Nemzoff edged out Merrill Lynch, Alex. Brown & Sons and Ernst & Young to negotiate the sale. “Josh has more experience that the other firms working with nonprofit hospitals,” says Cookeville City Manager Jim Shipley. “That’s what sealed it for us.”
Mr. Nemzoff’s career in many ways echoes the changes in the health-care industry. The son of two physicians, he was rejected by 60 medical schools after graduating from the University of Pennsylvania in the mid-1970s. His ego bruised, Mr. Nemzoff headed for business school, and in 1978 took his newly earned M.B.A. to Coopers and Lybrand in New York City.
At the time, the city’s budget crisis and the state’s attempt to cut health-care costs were squeezing hospitals. The result: some of the first hospital mergers, many of them arranged by Coopers & Lybrand. “We’d pull together the numbers for the hospitals, and show them these savings they could make up by consolidating,” Mr. Nemzoff says. “It was staggering.”
Those deals behind him, Mr. Nemzoff followed the action, eventually landing at Ernst & Young in South Florida, where managed care was just coming into its own. In 1989, he was the lead negotiator in the sale of the tiny Coral Reef Hospital.
Mired in debt and nicknamed “Coral Grief” by locals, the Miami hospital was a client that held little interest for most at Ernst & Young. But Mr. Nemzoff threw himself into the deal. “Josh was relentless,” says Randy Sucher, chief operating officer for Southern Medical Health Systems Int., the Mobile, Ala., company that owned, the facility. “He lived, breathed and slept the deal.”
Indeed, when First National Bank of Chicago, which had lent the hospital $15 million, refused to let $5 million of that debt slide, Mr. Nemzoff threw one of his not infrequent tantrums. He fumed that if the bank didn’t want to agree to his client’s terms, it could keep the hospital. Then he slammed a heavy ring of keys onto the conference table, cutting a large gash in the finish.
“I am not sure it helped,” Mr. Nemzoff sheepishly admits today. “I think [the banker] was more worried about the conference table than the deal.” (Both sides compromised, and the hospital was eventually sold to Columbia – one of the first facilities the company acquired.)
By that point, it was clear that Mr. Nemzoff had found his calling. It was also becoming clear, however, that Ernst & Young wasn’t the place for him. His abrasive personality clashed with the accounting firm’s corporate culture and often rankled clients.
He would make the son or daughter of a hospital’s founder “feel like an idiot for questioning some trivial detail of a sale,” says Ernst & Young’s Mr. Szaro.
And he seemed to have even less respect for partners at the firm. In one instance, Mr. Nemzoff, frustrated by his office’s phone-mail system, installed private telephone and fax numbers without telling his superiors. The managing partner, who learned of the lines when he spotted the phone company at work in Mr. Nemzoff’s office, was livid.
“I guess they thought I was being my usual obstreperous, obnoxious self,” Mr. Nemzoff says now. “But their phone-mail system sucked.”
Mr. Nemzoff concedes that he can be tough to work with and to manage. “I am no angel,” he says. But he says his problems at Ernst & Young stemmed from clashes with partners who were doing “one-third to one-quarter of the business that I was, and [they] weren’t used to letting senior managers make decisions.”
Birth of a Notion
In 1992, with relations at Ernst & Young growing tense, Mr. Nemzoff was tapped to lead the acquisitions division of Nashville-based Healthtrust Inc. – at the time the second-largest hospital-management company in the U.S. It was there that he spotted an interesting trend.
For years, for-profit chains had stuck to gobbling up competing for-profit chains. But that was beginning to change.
Managed care and the threat of healthcare reform were forcing struggling and even successful nonprofit hospitals to reconsider how they were running their operations. And, in many cases, nonprofits were simply deciding to get out of the increasingly complicated business, selling off their assets to large chains.
At Healthtrust, Mr. Nemzoff frequently found himself sitting across the table from the heads of nonprofit hospital boards. And, he says, they often had little idea what their assets were worth or how to sell them.
In 1994, with the acquisition of Healthtrust by Columbia/HCA on the horizon, Mr. Nemzoff jumped again, this time linking up with Ponder & Co., a Fort Worth, Texas, firm specializing in providing advice on bond issues to nonprofit hospitals. There, Mr. Nemzoff started a mergers-and-acquisition business directed at nonprofits.
The operation, one of the first of its kind, did little business early on: Only a handful of nonprofit hospitals were involved in mergers or acquisitions in 1994.
Then managed care began to rise. Hospitals were forced to economize, and huge, for-profit chains formed to compete with their nonprofit counterparts. In this new environment, nonprofit-hospital mergers and acquisitions began to take off, with more than 70 nonprofits involved in deals in 1995.
And Mr. Nemzoff couldn’t have been in a better position to take advantage of the trend. In January 1995, he helped a non-profit hospital in Fargo, N.D., merge with its for-profit competitor in a $60 million deal. Other transactions in Virginia and Maryland followed. By the spring of 1995, the firm was working on more than $1 billion of deals, says Lee Ponder, a principal with the company.
Rubbed the Wrong Way
But, in what was becoming a theme in Mr. Nemzoff’s career, his relationship with his employer, Mr. Ponder, began to strain. Mr. Nemzoff’s in-your-face style just never let up, Mr. Ponder says. “Josh is the best there is at selling a facility,” says Mr. Ponder. “But who wants to argue endlessly about where to eat lunch?”
Mr. Nemzoff’s personality irked some clients, too. A deal with what was then South Miami Healthsystem, a nonprofit hospital network in South Florida, soured when Mr. Nemzoff and the system’s executive committee found themselves at odds.
Mr. Nemzoff wrote what he admits was a “scathing letter” to the full board, trashing the executive committee for not wanting to sell to Columbia/HCA. Some members of the executive committee were so upset by the memo there was actually talk of hiring an attorney to pursue a defamation suit, say people at the hospital.
Soon after, Mr. Nemzoff says, the board “fired [me].” Recalls Robert L. Dube, the hospital’s chairman, “Josh is very intelligent, but he was just overpowering.”
Still, when Mr. Nemzoff left Ponder in May 1995 and started his own firm, he quickly found more work than he could handle. He had beaten some of his larger competitors into the business and gained a better understanding of its workings.
As the large merger-and-acquisition firms from Wall Street and the Big Six accounting firms rushed into the business, they typically led with their corporate-finance divisions. In many cases, they approached deals like securities transactions, offering to accept a percentage of the final sale price as a fee.
But that approach fell short. In the eyes of nonprofit boards, maximizing a deal’s value often took a back seat to such issues as charity care and employee-benefits packages. And those boards in turn worried that a fee structure tied to the total sale price would induce their representatives to push solely for top dollar while ignoring other consideration. (Mr. Nemzoff is paid a flat fee.)
Such concerns helped Mr. Nemzoff beat out a large investment bank and a national accounting firm for the right to negotiate the sale of Northwest Texas Healthcare System in Amarillo last year. “We wanted our indigents taken care of, and we wanted to have a nice nest egg, and we felt like Josh was going to be the best at meeting both of those goals,” says Jim Simms, chairman of the nonprofits board.
Now working on his own, Mr. Nemzoff’s blunt and independent style seemed to pay dividends. When an Amarillo newspaper clamored for news on the bids on the hospital system, Mr. Nemzoff stalled both the newspaper and his client, Mr. Simms, who had earlier agreed to release the numbers to the press.The reason: Universal Health Services Inc., the top bidder, had come in $67 million higher than the closest competitor, and Mr. Nemzoff knew that making the bids public would weaken his position as he negotiated the final deal with the hospital chain. Despite pressure, Mr. Nemzoff didn’t turn over the numbers until just three days before the accord closed.
Mr. Simms now concedes releasing the numbers might have cost the hospital money. “I wanted to get the bids out because I thought we had hit a home run for Amarillo,” he says, “But it turns out [Mr. Nemzoff] made the right decision.”
Mr. Nemzoff’s style rankled some during the sale of the city hospital in Cookeville, Tenn., too. At first, the city planned to do the deal itself, but quickly realized when it received the first wave of bids that the process was just too complicated.
The city then tapped Mr. Nemzoff. The consultant almost immediately infuriated bidders by demanding that the bids be resubmitted, reasoning publicly that the move was needed because the process had been poorly structured the first time.
But he also says he knew the bids would rise. And indeed the winning bidder, Fort Sanders Medical Center in Knoxville, raised its offer to $141 million, a leap of more than $13 million.
Mr. Nemzoff delights in such successes. At age 43, he recently indulged a childhood dream, buying a Porsche 911 that he had coveted for years. But three weeks later, he decided it was too cramped and sold it.
Telling the story to a visitor, he pauses, leans back in his chair and smiles. “By the way, he adds, “I sold it for more than I bought it.”