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M&A 2010: More Buying, Less Spending

May 26, 2011
by Ben Rooks
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The Big Get Bigger, as Consolidation Leaves Fewer Freestanding Companies
Ben Rooks
Ben Rooks

Interestingly, while 2010 saw a fairly active level of M&A, fewer companies from last year's list were sold compared to previous years. This suggests that consolidation activity, while still quite robust, is focusing more on smaller companies, in part because the larger companies have already been consolidated. Where the 2010 list saw nine exits, this year saw only five (plus two instances of private equity firms purchasing from another investor). More on overall consolidation trends in a moment, but first let's review the top deals from the HCI 100.

A ROSE BY ANY OTHER NAME

Unless readers have been living in a cave, they likely know that the Eden Prairie, Minn.-based Ingenix subsidiary of UnitedHealth Group was by far the most acquisitive company this sector has seen in recent memory. One might have missed the April name change, however, to OptumInsight (#17). Whatever it's called, the company has continued its acquisition binge, this year adding a level of clinical depth to its portfolio. Purchases in 2010 included health information exchange (HIE) vendor Axolotl; high acuity vendor, Picis (#43 on last year's list); medical necessity and compliance vendor, Executive Health Resources; and natural language coding vendor A-Life Medical (#95 last year). One wonders if UnitedHealth Group has a grand strategy or is simply aggregating interesting assets and hoping for the best.

One wonders if United Health Group has a grand strategy or is simply aggregating interesting assets and hoping for the best. Based on their discussion in a companion article in this issue (page 52), there does seem to be the framework of a plan, but the assets still appear more disparate than most (I see few commonalities between A-Life or CareMedic with Picis or Axolotl). That said, immateriality can mean rarely having to say you're sorry (at least to your shareholders). With its parent, United generating cash from operations last quarter in excess of $1.2 billion, it has more than a little wriggle room should a misstep occur. By way of comparison, that amount of cash flow is greater than the revenues of all but the top eight vendors on this year's list! OptumInsight's run rate (last quarter times 4) earnings alone was greater than the revenues of all but the top third in our corner of the pond! We would expect the company to take a slight breather from its torrid purchase pace, but still continue to look to fill in its growing portfolio.

EXPANDING CONNECTIONS

Connectivity vendor, Emdeon (#11), Nashville, Tenn., continued to be high on the activity list with four acquisitions (up from three last year). Most dramatic was its purchase of Medicaid eligibility vendor, Chamberlain Edmonds in November for $260 million, moving it to a more services-heavy offering. Tuck-ins included data conversion services company, FutureVision Technologies (for $20-60 million, depending on performance); payer consulting company, HTMS (for $11-25 million) and Chapin RCM, a hospital-focused tech-enabled outsourcer (for $19-27 million). The other major connectivity vendors were also active with Availity (#57), Jacksonville, Fla., acquiring RealMed (expanding both footprint and functionality) and Boston-based NaviNet (#77) acquiring e-prescribing vendor Prematics (giving it additional product to push through its physician channel).

DOES SIZE MATTER-OR BREADTH?

The sector's largest deal in 2010 was clearly Chicago-based Allscripts' (#13) $1.3 billion purchase of Eclipsys (#13 last year) and then its separation from Misys. Both companies believe that a unified offering (physician and hospital) was necessary to compete and had discussed joint selling arrangements; from there, conversations appeared to move towards a combination, with (interestingly) no move by Eclipsys to launch a formal sales process to seek alternate buyers (as discussed in the companies' SEC filings).

Roll-ups in this sector (more than most) tend to be fraught with danger, but with the stock up 10 percent YTD (similar to athenahealth, but trailing Cerner's 18 percent), investors seem cautiously optimistic and the view of CIOs remains less clear. It makes your humble author glad he's no longer in the business of picking stocks, however.

ROUGHLY ONE THIRD OF THE TOP 100 COMPANIES WERE NO LONGER FREESTANDING COMPANIES, SHOWING JUST HOW MUCH CONSOLIDATION HAS OCCURRED IN A RELATIVELY SHORT PERIOD.

Two large software vendors made meaningful purchases outside their HCIT divisions that were noteworthy. Alpharetta, Ga.-based McKesson's (#1) $2.2 billion purchase of US Oncology (a network of more than two thousand oncologists) is intriguing not only for its size, but ultimately its informatics implication. With the need for better drug outcomes data in all medical treatment, but especially cancer, the downstream data this combination could create makes it worth keeping an eye on. RCM software and group purchasing vendor MedAssets (#30), Alpharetta, Ga., made a $850 million purchase of its GPO competitor, Broadlane. Sadly, Broadlane subsequently lost a major client with poor effect on MedAssets' share price.

A SPATE OF TUCK-INS

Other HCI 100 activity included some smaller deals from frequent buyers: Philadelphia-based Wolters Kluwer Health's (#15) acquisition of Pharmacy OneSource and Nuance's continuing consolidation, this time with Language and Computing and Encompass Medical joining the fold. Hyland Software (#69), Westlake, Ohio, continued its HIM and RCM activities, buying Computer Systems Co. (#93 last year). Note that this is not to be confused with huge multinational IT vendor, Computer Sciences Corp. (CSC) (#8), Falls Church, Va., which announced its intent to acquire UK vendor iSoft (in a deal that hasn't closed yet). Dell (#2), Round Rock, Texas, tucked in storage/backup vendor InSite One as well as a handful of non-healthcare specific solution providers. Fans of Star Trek “ComBadges” [sic] will be happy to see Vocera Communications (#76), San Jose, Calif., joining the list, in part due to its acquisitions of two companies focused on patient hand-offs, Integrated Voice Solutions and Clinical Health Communications, as well as the patient experience consulting firm, ExperiaHealth.

Perhaps in part due to the excitement around HCIT as a whole, a few private equity-backed companies traded hands as well. AdvancedMD (#82 last year) was acquired by payroll vendor ADP, seeking to move from merely handling medical office payroll to the practice management and clinical data front. No doubt they'll find it a bit harder. API Healthcare (#72), Hartford, Wis., announced its intent to sell to Kronos (#41), Chelmsford, Mass., but as of this writing, the merger is pending extended antitrust review. Surgical Information Systems (#90), Alpharetta, Ga., Netsmart (#60), Great River, N.Y., and PHNS (now Anthelio) (#42), Dallas, were each sold by one PE firm to another (known as a recapitalization in the trade), which always reminds me of baseball card trading, but as long as the value keeps increasing, who can complain?

GONE BUT NOT FORGOTTEN

I was curious to see how the 2010 list compared to the 2005 list so, with a spin through the Healthcare Informatics Time Machine (and help from its editors) I pulled the 2005 HCI 100 List. Roughly one third of the top 100 companies were no longer freestanding companies, showing just how much consolidation has occurred in a relatively short period. Looking only at the top quartile, nine of the 25 have been subsumed into other entities. This included IDX Systems (General Electric); Misys (divested to private equity and Allscripts); NDC Health (McKesson and Wolters Kluwer Health); Per Se (McKesson); Eclipsys (Allscripts); and FCG (CSC). The big get bigger, but so do the small, with #100 in 2005 (E*Healthline) tipping the scales at $15 million and this year's #100 of SCI Solutions, Los Gatos, Calif., weighing in at $23 million. This is part of what makes this sector so exciting for participants, there are always new companies with exciting technology emerging; and for investors, exit opportunities through M&A abound.

Ben Rooks ( ben@st-advisors.com) spent 15 years on Wall Street as both an equity research analyst and investment banker focusing on healthcare IT. He is the founder of ST Advisors, LLC, an HCIT-focused advisory firm serving both companies and their investors and serves on the editorial board of Healthcare Informatics. ST Advisors was pleased to count A-Life Medical, AdvancedMD, and NaviNet among its former clients but, as of this writing, is not actively engaged with any company listed above. Healthcare Informatics 2011 June;28(6):46-48


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