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The rate of health information technology acquisitions took a nosedive in recession year 2009, along with everything else. But after the market hit bottom, buying activity accelerated during the first quarter of 2010. And it hasn't stopped.

From May 2010 to April 2011, Health Data Management tracked 100 HIT acquisitions, compared with 76 during the same period in 2009-2010. And the deals have been considerably bigger. The median deal size for acquisitions-and equity investments-increased from $9 million in calendar year 2009 to $60 million a year later, according to Healthcare Growth Partners, an Elmhurst, Ill.-based strategic and financial advisory firm. Two vendors were particularly acquisitive during the past year; Vocera Communications and Ingenix each made four buys (see sidebar on Ingenix, which will change its name to OptumInsight this month, on page 42).

HDM counted 15 acquisitions with reported values of $100 million or more from May-to-April, compared with six in the previous 12 months. Industry observers say five other companies that were sold without publicly announced terms-Axolotl, Executive Health Resources, Gateway EDI, Keane and Sunquest-likely topped $100 million.

"The deal activity for the last 12 months has been remarkable and I think the activity in the next 12 months will accelerate," says John Osberg, principal of Informed Partners LLC, a Marietta, Ga.-based consulting firm. Better connectivity between providers, and between providers and patients, means everything in today's health care environment, and the past year's acquisitions reflect that: Insurer Aetna Inc. spent $500 million for health information exchange vendor Medicity Inc., with some estimates that the deal went for 10 to 12 times revenue for the private company in an era when two times revenue is good. Aetna CEO Mark Bertolini, in an April interview with Kaiser Health News was quoted as saying the company is becoming an I.T. operation as much as an insurance firm.

And the beat went on:

* Estimates range up to $270 million-maybe eight to nine times revenue-as the price Ingenix Inc. paid for privately-held HIE vendor Axolotl Corp.

* Pharmacy benefit management firm Medco Health Solutions Inc. paid $730 million for clinical trials vendor United BioSource Corp.

* Physician vendor Allscripts Corp. forked over $1.2 billion in stock for hospital information systems vendor Eclipsys Corp.

* Hospital vendor Meditech Inc. bought LSS Data Corp., its long-term ambulatory partner, for $13.7 million.

* Drugstore chain Walgreens Inc. paid $409 million for dot-com survivor drugstore.com to substantially increase its online presence to consumers.

* Government contractors Harris Corp. and Smartronix Inc. entered the health connectivity wars with Harris paying $155 million for integrator Carefx and Smartronix buying HIE firm Cogon Systems for an undisclosed price. "I would expect military contractors to jump deeper into health I.T. soon-maybe this year," Osberg predicts. "They understand secure communications and government contracting, and protecting health information is getting news every week."

Gearing up for new era

The consolidation of provider organizations is accelerating as health systems gear up for an era that will place a premium on the continuum of care and the concept of accountable care organizations. That trend was reflected in M&A activity as vendors of home health, quality reporting, compliance and data analytics applications were scooped up.

In addition, two of the bigger deals of the past year had an international flavor: After the National Health Service in England dropped its requirement that providers acquire I.T. from designated vendors, two American firms with some NHS business swooped in to try to get more. McKesson Corp. paid $141.5 million for British firm System C Healthcare, and Computer Sciences Corp. paid about $188 million for iSoft Corp.

What happened in the M&A arena had interesting ramifications, but what didn't happen might be equally significant: The overcrowded electronic health records market didn't consolidate.

Well over 200 EHR vendors are fighting for meaningful use business. How crowded is the field? As of mid-April, the federal government lists 393 Complete or Modular certified ambulatory EHR products, along with 182 certified inpatient Complete or Modular products.

There were several good reasons for the non-event, but consolidation's got to come soon, says Rob Tholemeier, senior research analyst at Crosstree Capital Partners, a Tampa-based corporate financial advisory firm. "There has never in the history of software been 200-plus companies selling similar functionality," he notes. "Less than a dozen-maybe a dozen at most-will survive."

Where were the EHR sales?

While the past few years have been boom times for many EHR vendors thanks to the federal EHR incentive program and other enticements for providers to automate, the butcher's bill is coming due for some companies, particularly in the ambulatory space, predicts consultant Osberg.

Hospitals are buying physician practices and standardizing ambulatory I.T. on the product lines of the leading 10 vendors in the market. That's freezing investments in the other 190 or so ambulatory vendors, many of whom are struggling to raise capital. "Investors aren't going to put money in a vendor that isn't riding that wave," he says.

Further, many EHR vendors are not moving as rapidly as other I.T. companies to the cloud and software-as-a-service model, and investors increasingly frown on products not SaaS-based, Osberg says. While he expects accelerated EHR consolidation during the next year, he believes much of the activity may come via attrition rather than acquisition.

And making themselves even less attractive for acquisition, EHR vendors are overvaluing themselves because of the accelerated adoption of clinical systems resulting from the EHR incentive program. "The stimulus money is allowing management of these companies to believe their growth rate is 50 to 100 percent," says financial advisor Tholemeier.

Consequently, these companies are asking not for two times revenue to sell, but two times their self-projected growth, he adds.

But buyers don't just think about a revenue multiplier when deciding on a price. Equally if not more important is a acquisition target's earnings before interest, taxes and amortization, which shows what cash flow a buyer can expect from an acquisition.