Investment firm Elliott Management has proposed acquiring Watertown, Mass.-based health IT vendor athenahealth in a deal worth nearly $7 billion.
In a letter sent to athenahealth’s board of directors on Monday, Elliott said the bid of $160 per share represented “a premium of 27 percent to the current stock price,” and also “represents compelling, premium value to shareholders.” In the letter, the investment firm also said it may also be able to substantially improve the proposed price. Elliott says it owns 8.9 percent of the company’s common stock.
Elliott, the New York hedge fund led by billionaire Paul Singer, made an all-cash takeover offer, which would value athenahealth at $6.9 billion. According to a Bloomberg article, the company's stock jumped 26 percent on Monday morning on the heels of the announcement.
In a statement released Monday afternoon, athenahealth said the company’s board of directors would review the unsolicited acquisition proposal. In the 2017 Healthcare Informatics 100, athenahealth was ranked 15th with a health IT revenue of $1 billion.
In the letter, the investors acknowledge “how rare it is for a company to achieve the level of success realized by athenahealth,” and that “athenahealth has great potential with a differentiated opportunity to fundamentally change the healthcare IT industry.” However, the investors also criticized leadership at the electronic health record (EHR) vendor for failing to make the changes necessary “to enable it to grow as it should and to create the kind of value its shareholders deserve.”
“We are faced now with the stark reality that athenahealth as a public-company investment, despite all of its promise, has not worked for many years, is not working today and will not work in the future,” the investors state in the letter, specifically noting the company’s problems in the areas of sales execution, service delivery, product focus, forecasting, executive turnover, capital allocation, management discipline and corporate governance.
“It is clear to us and becoming clear to many others that athenahealth’s potential will never be realized without the kind of operational change that the company seems unable to deliver. Beyond operations, our dialogue with the company has also revealed an unwillingness to pursue alternative strategies for realizing athenahealth’s proper value,” the investors wrote in the letter, noting that it approached athenahealth last November about the possibility of a take-private transaction involving Elliott or other interested parties. “The company refused to engage,” the investors wrote. “Whether operational or strategic, athenahealth appears unable to achieve the right outcome for shareholders on its own.”
Elliott first took a stake in the company in May last year. Since then, athenahealth’s CEO Jonathan Bush ceded his chairmanship, the company replaced its chief financial officer and announced plans to cut its workforce by 9 percent. In February, Jeffrey Immelt, former CEO of GE Healthcare, was named chairman of the athenahealth board.
Further, Elliott said in the letter that athenahealth’s stock price has underperformed because the company has failed to correct a host of identifiable operational issues. “This chronic underperformance is driven by athenahealth-specific factors including poor execution, significant management turnover, inefficient allocation of resources and the loss of strategic focus,” the investors wrote in the letter.
Ben Rooks, founder and principal, ST Advisors, a strategic and financial advisory firm focused in healthcare IT, said of the proposed deal, and the 20-percent premium on the offer: “It’s enough to get people’s attention, but it’s not definitive, given athenahealth’s historic stock volatility. It probably sets a floor on the stock. I would have a concern that it could disrupt sales in the near-term for athena, as we saw a couple of years ago in the case of Allscripts.”
The company’s culture is driven by its outspoken CEO, Bush, and that impacts the company’s valuation, Rooks says. “athena has always traded at a premium valuation, in no small part because of Jonathan. If you were to take him out of it, assuming you even could, what would that do to the company, long-term?”
Rooks notes that a traditional leveraged buyout (LBO), as proposed by Elliott, would be challenging. “It’s tough to see a hostile LBO working, given athena’s culture. And Elliott has a track record of winning the fights they get into,” he says.
Strategically, Elliott’s proposed takeover offer has now put the company into play, Rooks notes, and it's possible other companies will show interest. “Will that lead tech companies to decide to leap in and try to buy it? Will it prompt other tech companies to go after athena? If it does, I would caution them to look at the treacherous path that all tech companies entering healthcare IT have experienced. For example, GE/IDX and Misys/Sunquest/Medic," Rooks says. [editor’s note: GE Healthcare acquired IDX Systems for $1.2 billion in 2006. IDX solutions were rebranded Centricity and GE is now exploring selling off parts of its health IT business. Misys, a U.K. software and services group, acquired Medic Computer Systems, a provider of practice management and medical record systems to physicians, in 1997 and bought Sunquest, an IT provider in the hospital market, for $404 million in 2001. The company then sold Sunquest six years later, in 2007.]
Rook continues, “The playing field is littered with tech companies that have tried to get into healthcare, even Siemens and SMS. It’s hard.”