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.