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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.


Four of last year's Top 100 list companies have taken this route or announced their plans to. Leading the pack, BPO vendor Affiliated Computer Services (No. 2) announced in March that a private equity firm had made an $8 billion (including assumption of debt) acquisition offer, almost a 17 percent premium. Also in March, Kronos (No. 23) announced it too was being taken private by a private equity firm for $1.8 billion (a 13 percent premium to its current stock price). The month prior, another outsourcer, Keane (No 20), announced it was being acquired by private-equity-backed Caritor for $854 million, about a 19 percent premium. While not a total pure play, but still HCIT-focused, former dotcom high flyer and 40th ranked Quovadx (who could forget its earlier high multiple name “X-Care.Net”?) also left the stage. After announcing it was seeking “strategic alternatives” last August, it sold the CareScience division to group purchasing organization (GPO) Premier for $35 million or 2.3 x 2006 revenues while simultaneously announcing the sale of the remaining pieces of the company (Rogue Wave Software and the Cloverleaf integration engine) to a private equity firm for $137 million. Netsmart Technologies (No. 50), a behavioral health facility software vendor, announced a take-private transaction in November for $115 million (1.8 x revenues and 11.3 x EBITDA) a 23 percent premium over its earlier trading price. While not a public company, Companion Technologies (No. 44) also went the private equity route, as Blue Cross Blue Shield of South Carolina, its owner, realized that selling physician software wasn't exactly a core competency and sold it to a pair of private equity buyers which plan to use it as a platform for growth.

Larger companies rounding out offerings through smaller deals

In keeping with the high level of activity, a number of other transactions occurred as some larger companies expanded their product offerings. None of the prices paid were disclosed as they were viewed as “immaterial” to the buyer (but clearly not to the seller). At the top of the list, Cardinal (No. 1) acquired small hospital point-of-care vendor Care Fusion and 3M's HIM division acquired SoftMed Systems, another HIM vendor for a rumored 12 x EBITDA. Looking to the pharma side of the world, Cerner (No. 6) acquired Etreby, a retail pharmacy system vendor and Galt Associates, which provides drug safety and compliance tools to drug companies. This appears to be a new vertical for Cerner, selling directly to pharmaceutical manufacturers and could suggest new areas for its expansion. Eclipsys (No. 14) also made two small acquisitions, buying India-based lab software vendor Sysware Healthcare Systems, giving it the ability for off shore development and also purchasing acuity-based nursing staffing vendor Van Slyck and Associates.

Payer software consolidation

While TriZetto Group was not on the 2006 list (it was 23 the prior year), it continued its aggressive consolidation strategy acquiring Plan Data Management for $58 million and Microsoft .net-architected competitor Quality Care Solutions (QCSI) for $146 million, 2.6 x revenues and 15.2 x EBITDA. Given TriZetto's stock appreciation and April raising of a $230 million war chest, more MandA is clearly on the horizon.

Another managed care solutions provider found a home as publicly- raded DST Corporation acquired claims software vendor and outsourcer Amisys Synertech (once owned by HBO and Co.) for $138 million or 1.3 x trailing revenues

.

New entrants to the vertical

Despite the size of the market, Microsoft had never made a product-focused play into healthcare, preferring to stay in the background selling NT licenses, other tools and the like. This changed in July when it acquired the SQL-based Azyxxi which, while really a product, not a company, was as impressive a data repository as I'd ever seen. This was followed during HIMSS by its announced acquisition of start-up medical search engine vendor Medstory. While clearly not spending a lot on the corporate development front, Microsoft is apparently targeting this market and is building an enterprise sales force to do so. Also recognizing the size of the market, outsourced call center vendor West Corporation acquired TeleVox Software (No. 69) for $138 million, making it a great day for TeleVox.

Rounding out the rest

WebMD continued its aggressive growth, acquiring Summex for $30 million (5 x revenues) and Subimo for $58 million (2.6 x revenues and over 15 x EBITDA) both on the consumer/corporate side while also buying pharma-focused dotcom survivor Medsite for $41 million (3 x revenues). Medsite was at one time the "physician version" of Amazon.com (valued privately more than $180 million), and unlike many of its contemporaries, it survived its dotcom days.

Ingenix (No. 10) continued to aggregate e-commerce vendors, buying Claredi and NWH. On the hospital revenue cycle management front, Accuro Healthcare Solutions (No. 45) bought Woodmoor Group and CDMServicesGroup, two small business office-focused companies, and CareMedic Systems (No. 54) acquired ActaView.

In possibly its first acquisition ever, MEDITECH (No .17) announced in April that it was acquiring its home care partner Patient Care Technologies. While not a sizable purchase nor the signal of a change in strategy to become acquisitive, a first acquisition is always notable. Finally, Spheris (No. 19) acquired smaller transcription vendor Vianeta, and VantageMed (No. 79) was acquired by Nightingale Informatix for all of $13 million.

Failed (so far) auctions

Not to end on a sad note, but a seller's (and banker's) nightmare is having an auction and not finding a buyer. This happened twice that we know of, and almost certainly there were a few less public examples this year with the announcement in July by No. 11 ranked Misys Healthcare's parent, Misys plc, that it had authorized members of its senior management to explore acquiring the company. A month later, it announced that other parties were evaluating the business and in late September it ended the process, having received no offers worthy of sharing with shareholders. Not surprisingly, the parent changed CEOs shortly thereafter and Misys Healthcare soon followed suit.

iSoft (No. 13), apparently having learned that winning the mandate for the U.K.'s Connecting for Health project is a blessing on the order of the Chinese curse about “living in interesting times,” announced in October that it was lowering its revenue forecasts and putting itself up for sale. To date, no buyers have been announced here either. Maybe it's a British thing.

Looking backward, looking forward

And so, in one of the best years for MandA in memory, of the Top 100 (and a few other sizable players), we see 11 sellers (or other changes in ownership) and 9 buyers, but many of them taking multiple bites as the big become still bigger. Looking forward, I would expect many of the buyers mentioned to keep up their pace of acquisition and at least a handful of sizable, but not huge, sales ($300-$500 million) to occur as well as several companies going public in the coming year.

Ben Rooks (brooks@williamblair.com) is a recovering research analyst and an investment banker in the Healthcare Group at William Blair and Company L.L.C. and a member of the Healthcare Informatics Editorial Board. William Blair acted as financial advisor in the sale of TeleVox Software, Companion Technologies and Netsmart Technologies and also advised TriZetto Group on its acquisition of QCSI.


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