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

May 31, 2017
by Ben Rooks and Michelle Mattson-Hamilton, ST Advisors
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Reviewing another interesting year in healthcare IT M&A

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

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