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On the M&A Front

June 1, 2007
by Ben Rooks
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Some of the most noteworthy healthcare business deals were inked in the year 2006

Ben rooks

Ben Rooks

Since last June's publication of the Healthcare Informatics 100, mergers and acquisition activity in the healthcare information technology (HCIT) sector has continued at a torrid pace, as it has in the broader economy. Fueled by a combination of low interest rates, companies eager to find new growth opportunities and continued excitement around the sector, close to a dozen of last year's list have been acquired, as well as several companies that likely should have been included in the 2006 edition. (Please note, rankings in this article refer to 2006, not 2007.)

The top (five) closed deals

The largest healthcare IT-related sale by far was the sale of Kodak's $2.5 billion healthcare division to Canadian buy-out firm Onex Corporation for close to $2.55 billion. Widely shopped to both strategic and financial buyers, this division sold for 0.93 x trailing revenues (of which a large percentage were imaging machines and film). Kodak could never seem to find its way in the post-film environment, acquiring dental systems, PACS, and even flirting with evolving into a full-scale enterprise systems provider, but ultimately floundering. Perhaps our neighbors to the north will bring better focus to their new investment; now renamed Carestream Health.

Next largest was No. 4 McKesson Corporation's purchase of No. 15 ranked Per-Se Technologies for $1.8 billion or 3 x trailing revenues and 14.7 x EBITDA. What was most interesting about this transaction (at least to me) was that, rather than being driven by the Provider Technologies side of the business (formerly known as HBOC), it came from the distribution side of the business, which was eager to acquire the retail pharmacy assets Per-Se had gained through its purchase of NDCHealth the prior year. The initial impetus for the combination came from a meeting to discuss McKesson licensing the pharmacy systems and network that came along with the NDCHealth purchase. In addition to the retail pharmacy products and network, the Provider Technology side got Per-Se's ultra-small practice management systems (a legacy of NDCHealth), its connectivity/EDI products and, of course, its hospital-based physician outsourcing division, with over $300 million in run rate revenues.

In shades of its earlier self, McKesson was the most active buyer this year, also acquiring No. 82 vendor Practice Partner (formerly known as Physician Micro Systems) to expand its small practice offerings. Practice Partner reportedly had about 1,500 mostly small practices and the HIMSS buzz suggested it sold for about $40 million. Given the size, McKesson opted not to disclose any financial metrics. Earlier last year, McKesson acquired venture-backed RelayHealth for a rumored 5-6 x revenues in a “highly strategic” deal. RelayHealth provided technology to allow physicians to securely communicate via e-mail with their patients, often while receiving reimbursement as an e-consult. Subsequently, McKesson moved all of its transaction/connectivity assets, including the recently acquired HealthCom Partners, into this division and appears to be targeting Emdeon's connectivity dominance.

Speaking of No. 5 ranked Emdeon, the big question in last year's article revolved around its announced intent to sell and how those businesses would be unwound. As promised to the Street, in August, British software vendor Sage Software purchased the practice services unit for $565 million or 1.85 x trailing revenues and 14.5 x trailing EBITDA. Shortly after that deal closed, Emdeon sold a 48 percent interest in its business services unit (retaining all of Porex and ViPS) to private investor General Atlantic Partners in a sale that valued the division at $1.5 billion (2.1 x revenues, 10.3 x EBITDA).

Bidding farewell to public shareholders

Other publications have discussed the relatively recent acceleration in “going private” transactions where private equity firms acquire public companies, usually with current management's help. These deals usually are driven in part by the expectation that, freed from investors' quarter to quarter scrutiny, better performance will occur. These are high profile deals and lawsuits often follow alleging that a better price could have been found, had management tried harder.