Gone Shopping

June 24, 2011
Ben Rooks Looking at the level of mergers and acquisitions activity since last year's M&A article, the pace of consolidation appears to have taken
Ben Rooks
Looking at the level of mergers and acquisitions activity since last year's M&A article, the pace of consolidation appears to have taken a slight breather compared to the rate of the last two years. Where last year's review saw 33 transactions (in the year ending in June, 2008), this year, we see only 25. The reason, to a certain extent, could well be ripples from the sub-prime market meltdown.

Unless you've been living in a cave (or, perhaps a server room), the sub-prime issues can't be a surprise; but their effect on M&A might be. The reason is much of the recent M&A boom had been fueled by easy credit to both corporate and private equity (PE) buyers. Changes we've seen in the overall credit markets have meant that PE buyers seeking to acquire operating companies have not been able to stretch as far on value as they previously could. As a result, the pendulum is shifting a bit in favor of traditional strategic buyers.

The change is apparent even in the tone of the buyers. Where several years ago, when I worked to sell a company, many PE firms would express concerns to me that they were at a competitive disadvantage to strategic buyers, because a similar company would be able to benefit from synergies that would allow them to bid higher. A year later, the tide had turned and the strategic buyers would complain that they were often unable to compete with PE firms' easy access to credit and leverage (and whose return requirements were hence easier than a public company's).

A year later, the balance has shifted back, and more strategic buyers are able to competitively bid for quality companies. While the PE firms are still active and eager to put their investors' money to work, the strategic buyers are clearly back in force. An even more powerful category, which we saw several times last year, was PE-backed strategic buyers, who can benefit both from access to capital, PE aggressiveness and some synergies thrown in for good measure. With that context, let's first review the activities of private equity firms and their portfolio companies over the past year.

Strategic buyers with other peoples' money — the best of both worlds?

The largest hybrid deal of the year was release-of-information leader SDS (aka Smart Document Solutions) being acquired by PE-backed physician software vendor, Companion Technologies, for $185 million. SDS' management team remained to run the combination, now renamed Healthport (Number 30). Similarly, PE-backed Quovadx acquired long-shopped HealthVISION for an undisclosed, but likely a very small, price. HealthVISION's name and corporate location (Dallas) are the survivors here and we would expect the company to continue to seek targets.

Pure PE playtime

In April, payer software company, TriZetto Group (Number 14) announced that it was being bought by Apax Partners and two of its BlueCross BlueShield clients for $1.2 billion (2.74x revenue and 14.5x EBITDA). Despite the handsome payday, we believe management will remain in the saddle and continue to seek both internal and external growth opportunities. On a much smaller scale, rural hospital systems' vendor, Dairyland Healthcare Solutions (Number 64), was acquired by Francisco Partners (the fund's third HCIT investment).

In February, evidently pleased with the first 52 percent they acquired in November, 2006, General Atlantic, joined by Hellman & Friedman, purchased the remaining 48 percent of Emdeon Business Services (Number 8) from HLTH Corporation (Number 15) for $575 million.

Traditional buyers remain active

Looking at the purely traditional buyer universe, we saw multiple transactions at attractive values for sellers. Professional services businesses were popular as Perot Systems (Number 5) acquired Meditech-focused consulting vendor, JJWild (JJWild ranked in with Perot) for $89 million, or close to 1x revenues, and Cognizant Technology Solutions (Number 11) purchased pharma sales and marketing analytics firm marketRx for $135 million.

Speaking of consultants, having been told by McKinsey that they needed more healthcare focus, CSC (Number 4) emerged victorious in the auction held for publicly traded First Consulting Group (FCG) with a winning bid of $13 per share — a 27 percent premium to FCG's share price — an enterprise value of 1.1x revenues or 10.2x EBITDA.

In some cases, the strategic fit is so great that the potential buyer has an advantage over any other, be they financial or strategic; much like buying the apartment next door to yours, there's simply no buyer to whom it's worth more.

Two recent examples of this were Nuance's $400 million purchase of another transcription technology vendor, eScription, capping a series of five smaller buys this year. While full details of the transaction were not disclosed, it appears that they paid close to 13x trailing revenues. The product fit between emergency department information systems and an ED revenue cycle solution provider was so strong that clinical departmental vendor Picis (Number 37) saw such power in a potential combination that it withdrew its IPO filing to execute its acquisition of Lynx Medical Systems. Lynx brought Picis both high margin recurring revenues and a product with near instantaneous customer ROI. Once the corporate integration has occurred, we would look for it to again seek to pursue an initial public offering.

A similar strong fit was inherent in newly public MedAssets (Number 38) persuading its hospital revenue cycle management competitor Accuro Healthcare (Number 50) to sell for $350 million in cash and stock (16x trailing EBITDA or 5x LTM revenues), rather than pursue its IPO plans (Accuro had filed to go public with the SEC). Goodness of fit and financial profile seemed to support this valuation. Prior to its IPO, MedAssets had acquired hospital RCM vendor, XactiMed for $43 million, or 20x EBITDA.

With an already meaningful healthcare presence, like a European tourist enjoying the weakness of the U.S. dollar, Philips Electronics' healthcare division has been deepening its U.S. portfolio in multiple areas. Building on its patient monitoring base, Philips Medical dramatically increased its efforts, buying publicly held Visicu for $295 million, or more than 8x revenues. This followed its smaller acquisition in December of hospital monitoring software vendor Emergin and its August acquisition of RIS vendor, XIMIS. Philips' home-based patient monitoring side was not idle either, acquiring both sleep apnea solutions vendor Respironics for $5.2 billion, or 3.9x revenue, and Raytel Cardiac Services for $110 million, or 2x revenues.

As always, smaller, “tuck-in” acquisitions were present as McKesson (Number (1) purchased patient throughput software vendor, Awarix, for a rumored $30 million as well as instrument tracking vendor Rosebud Solutions and RCM vendor HTP (both for undisclosed amounts). Meanwhile, Eclipsys (Number 13) acquired Enterprise Performance Systems for $53 million. Additionally, MED3000 (Number 35) continued its quiet growth efforts, acquiring billing vendor Pathology Service Associates, perhaps to gain some intelligence on the emerging field of genetic medicine.

Last, but certainly not least

No doubt this year's most controversial combination was announced in March, when Allscripts Healthcare Solutions (Number 25) and Misys Healthcare Systems (Number 10) announced they were merging to become Allscripts-Misys Healthcare. Allscripts shareholders will hold 44.5 percent of the new combined company and Misys will hold the (majority) balance. To sweeten the deal for Allscripts' shareholders, however, Misys is throwing in a cash payment of $4.90 per share, to be immediately paid as a dividend to Allscripts' shareholders of record the day the transaction closes. Confused?

A lot is involved here, and there are elements of that old TV show Dynasty, so let's carefully review the situation: Readers will recall that last year, Misys had been in play with several parties evaluating the entire business for acquisition, but no buyers ultimately emerging. The company then divested its CPOE division (formerly PatientOne, formerly Ulticare) to QuadraMed Corporation (Number 34) for $33 million, or roughly 1x revenues. Simultaneously, it divested its hospital-focused business (i.e., Sunquest) for $382 million (2.35x revenues) to Vista Equity Partners (the fund that had acquired Surgical Information Systems in 2006). Students of history will recall that these numbers are fractions of what Misys had originally purchased these assets for.

Allscripts, meanwhile, had made two acquisitions before the fun began. In July, it acquired the physician software assets of Source Medical (Number 59), for $11.7 million, gaining more PMS users into which it could sell its EMR, while allowing Source to hone its focus on its core markets. More interestingly, in December, Allscripts announced plans to acquire Extended Care Information Network (ECIN), a hospital discharge planning system company that competed with a similar Allscripts product (acquired with A4) for $90 million, or 4.7 revenues/12x EBITDA. What made things interesting was that ECIN's chairman was Glen Tullman, Allscripts' chairman and CEO.

Turning back to the Allscripts-Misys merger, reading the press release and SEC filings of this transaction, it appears that Misys is the acquiring entity, but with Allscripts' management running the business from Chicago. Importantly, the value of the deal is (according to management) theoretically higher than the stock price suggests.

Here's how it's explained: the companies saw a value of $14.30 to $16.20 per share, derived as follows: Had the companies been one on Jan. 1, 2008 and had they been able to benefit from the anticipated cost synergies of $15-20 million, then the company would have had an equity value of (according to where comparable companies traded), $1.4-$1.7 billion, of which Allscripts' shareholders would own 44.5 percent. Add in the $4.90 dividend, and the stock is really worth $14.30 - $16.20 (or a 37-55 percent premium to the 30 day average stock price prior to the announcement, so pay no attention to what the market is saying: initially $9 post-annoucement, but now $12 as of this writing.)

Further adding to the complexity, Allscripts' board member, John McConnell, founder of A4 and Medic (which Misys bought to create the healthcare division) resigned rather than vote for the deal. ISS Governance Services, a proxy voting and corporate governance company, has placed the Allscripts deal on its “Pipeline of contentious situations,” suggesting the situation is uncertain and susceptible to shareholder activism; ultimately, however, we expect the transaction to close.

Clearly Allscripts will benefit from a new PM base into which it can sell its EMR products (much as it did when it allied with IDX Systems), but the execution challenge here is significantly greater, and the current stock price suggests investors remain aware of these issues.

Same time next year

As ever, we expect continued consolidation in the HCIT market as newer players emerge and best-of-breed vendors get acquired by larger vendors with sales forces to leverage. We have no doubt that more than a handful of this years' HCI 100 will be topics of discussion for next year's article.

Ben Rooks ([email protected]) is a recovering research analyst and an investment banker in the Healthcare Group at William Blair & Company L.L.C. and a member of the Healthcare Informatics Editorial Board. William Blair acted as financial advisor in the sale of SDS, marketRx, First Consulting Group and Lynx Medical System, co-advisor in the sale of Accuro Healthcare and as a co-manager on the IPO of MedAssets.

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