2016’s M&A within Healthcare Informatics’ Top 100—Caution Emerged

May 31, 2017
Our annual review of the Healthcare Informatics 100, as it relates to investments and M&A activity

Last year, we predicted that 2016 would herald slightly muted transaction valuations and a reduction in the total number of completed healthcare IT (HCIT) transactions. Instead, after a somewhat muted first half for financings, we had another overall industry record-breaking year for both investments and M&A activity, albeit less among the top-tier vendors within the Healthcare Informatics 100. This could be regression to the mean after a torrid level of activity in 2015, or it could well be a result of some players remaining comfortably on the sidelines as they absorb past acquisitions, focus on internal growth or, perhaps wait for valuations to come down.

As we begin our annual review, let’s begin with what didn’t happen!

The Dog that Didn’t Bark

In February, 3M Health Information Systems (#20) announced that it had made the decision to “retain and further invest in” its $760 million revenue health information business (it had announced it was exploring strategic alternatives the previous September). Why the lack of buyer interest in such a quality asset? Most likely a combination of value expectations and, equally importantly, the tax impact to 3M of making so much money on selling assets it had owned for so long (and grown so much). While such a large gain would have posed a high-class problem, it’s not the first time tax planning served as the tail that wagged the dog. The company later acquired a Switzerland-based medical coding technology company called Semfinder and announced a partnership with Google’s Verily focused on population health management. According to published Wall Street research, as recently as October, NextGen Healthcare (#31) had reportedly retained a banker to explore a sale, an event that has yet to occur, and as of May 30, potential buyers are refining bids for The Advisory Board Company (# 19).

Finally Free of HBOC (well almost)

McKesson (#4) continued shedding its HCIT-focused assets, first selling its fairly small (and typically small group/solo doc-focused) ambulatory assets to PE-backed eMDs. Much more significantly, the company also combined the majority of its technology solutions with the majority of the assets of Blackstone-backed Change Healthcare, formerly known as Emdeon (#11), into a new entity (also to be called Change Healthcare). This new company will have over $3.4 billion in revenues and be a major player in the space. The structure, valuation, and other math that this transaction required to be tax efficient (see above on 3M) is beyond the scope of this article, but it’s fair to say the lawyers earned their fees on this one!

PE + Strategic = Great Price

Speaking of interesting transaction structures, Netsmart (#46) was sold for $950 million in March 2016, in a fairly unusual fashion. The company was acquired by a joint venture of PE-firm GI Partners and Allscripts (#13), with Allscripts also contributing its homecare software business (which was always non-core, having originally been part of A4 Health Systems). This PE-backing of a strategic buyer is new to HCIT, but has worked well in other industries, as it gives the financial investor (in this case GI partners) “an edge” on buying the target (Netsmart) and the company (Allscripts) the ability to stretch on value. How much credit Allscripts investors will give over the long run, however, remains to be seen. Later in the year, Netsmart continued its acquisition pace, purchasing long-term care vendor, HealthMEDX.

Meanwhile, Investors Remain Active

Other notable private equity transactions included TPG’s purchase of Mediware (#65) from Thoma Bravo (current owner of MedeAnalytics, #83. Thoma Bravo was busy last year, as it also took Imprivata (#71) private for $544 million (a 33 percent premium to its stock price). On the liquidity side, Brightree (#79) was sold by its sponsor (Battery Ventures) to apnea-focused medical device company, ResMed, for an impressive $800 million (7x revenues and 14x EBITDA), as the CPAP manufacturer sought opportunities for growth and to get closer to its DME vendor supply chain.

Big Blue Gets Bigger Still (but will it ultimately sing the blues?)

IBM (#24) continued its binge (recall our view that “immateriality means never having to say you’re sorry”) and purchased Truven for a whopping $2.6 billion (6x revenues and 23x EBITDA – wow!). This following the aggressive prices paid for Explorys, Phytel, and Merge the prior year. We can only wonder if Watson builds its own valuation models and what it’s thinking.

Hoping that lightning will strike twice, Truven’s former PE owner, Veritas Capital, then proceeded to acquire the healthcare business (now known as Verscend Technologies #42) from Verisk Analytics for $820 million, as Verisk decided to return to its core markets while capitalizing on the on-going demand for HCIT properties.

Population Health, still Popping

Other interesting, albeit smaller, population health-related activity included HMS (#30) taking a step towards this side of the sector, as the organization moved from pure cost containment (payment integrity, fraud prevention, and other more revenue cycle-focused tools) towards patient-facing solutions with its $20 million acquisition of care management vendor, Essette. Meanwhile, publisher Wolters Kluwer (#23), best known for owning UpToDate, also moved toward patient-facing solutions with its $170 million (6x revenues) purchase of Emmi Solutions, and Teladoc (#76) expanded its patient engagement offerings by acquiring HealthiestYou for $125 million in cash and stock (12x revenues!).

Also within population health, Philips (#5) acquired Wellcentive for $165 million (8x revenues). This was one of the bigger surprises last year, given Philips’ historic focus on healthcare solutions that existed within arms’ reach of patients (such as Visicu, and its other more monitoring or imaging-type products. athenahealth (#15) also expanded its population health portfolio with its $15 million purchase of care coordination vendor, Filament Labs (dba Patient IO).  One final population health transaction of note in the Top 100: GE Healthcare (#12) purchased the balance of Caradigm (#99 in 2015) from Microsoft.

Hospitals Vendors Quieter and RCM Slows as Well

Hospital vendors were a tad quieter this past year, although Omnicell (#22) purchased pharmacy vendor Ateb, moving it outside the pure enterprise, for $41 million, and Vocera (#74) purchased clinical alarm and event management workflow vendor Extension Healthcare for $55 million.

Other than McKesson/Change Healthcare’s combo, the Top 100 vendors were less active in the revenue cycle management space than in years past, but ABILITY Networks (#75) continued its active consolidation efforts, with two small tuck-ins—analytics vendor G4 Healthsystems and long term care-focused eHealth Data Solutions for undisclosed amounts, while Availity (#50) tucked in both RevPoint Healthcare Technologies for patient access solutions and FORE Support Services for its preauthorization capabilities. nThrive (#28)—the MedAssets/Precyse combination—acquired both Equation (a financial and clinical healthcare analytics company) and Adriema (a patient access vendor).  All that said, we’re aware of multiple processes and many hungry investors all around RCM, so we’d expect this section of next year’s list to be more active.

Looking Forward

We see countervailing forces driving the level of activity in the coming year. Given legislative and reimbursement/enrollment uncertainties in the current political climate, both providers and payers seem to be slowing vendor purchasing, which means said vendors are likely to see some weaknesses in bookings (obviously, this will be extremely impactful to smaller vendors and somewhat less impactful to the Top 100 vendors we profile). While this trend could make companies more hesitant to acquire, it will also likely force smaller targets into play and on the menu.

Private equity investors remain highly active, with a tremendous amount of “dry powder” sitting in their bank accounts and in need of deployment, which will drive valuation (and hence activity) upward for the highest quality targets. This suggests 2017 will be a year resulting in a two-tailed distribution of transaction size.

Either way, it’ll be an interesting year—but they always are!

Before founding ST Advisors in 2009, Ben Rooks ([email protected]) spent 15 years on Wall Street as both an equity research analyst and investment banker focusing on healthcare IT.

Michelle Mattson-Hamilton ([email protected]) spent three years in corporate strategy in the telecommunications industry before making the move to healthcare IT and joining ST Advisors six years ago.

ST Advisors is a strategic and financial advisory firm focused in healthcare IT that serves both companies and their investors (as well as, occasionally, plans and providers).  Of the companies mentioned above, ST Advisors has provided advisory services in the past three years to 3M, Caradigm, FORE Support Services, GE Healthcare IT, TPG Capital, and Vocera.