Still Waiting for Consolidation Wave
January 2005
Vendor consolidation in the health care information technology industry moved at a tepid pace in 2004. "It was a cautious year, it was a year of a lot of tire-kicking," says John Osberg, president of Informed Partners LLC, a Marietta, Ga.-based consulting firm.
Vendors used acquisitions to fill holes in their product lines or position themselves for new markets, but took few risks.
The number of acquisitions in the past 12 months was on par with those made in 2003, which had a merger and acquisition climate that Health Data Management termed "downright boring" a year ago.
In addition, the value of the deals in 2004 generally were smaller. Only two publicly announced acquisitions were valued at $100 million or more, compared with four deals in 2003.
This past year continued a four-year trend of slower vendor consolidation in the health care I.T. industry. The years 1998 through 2000 saw substantial consolidation as companies used overvalued stock prices to make huge acquisitions; 2000 alone saw five deals worth more than $1 billion each. But the days of blockbuster deals when companies swallowed dot-com firms and established vendors left and right remain a memory. Many vendors paid dearly for those acquisitions and the lessons haven't been lost.
QuadraMed Corp., for instance, had a voracious appetite for other companies in the previous decade, but has struggled-under different leadership-to digest or divest the firms it bought. Still, the company has continued to make acquisitions, albeit at a far slower pace. Further, it believes the climate is right for a new wave of consolidation-and would like to lead the wave, says Larry English, chairman, CEO and COO of the Reston, Va.-based company. However, "we are very disciplined financially and are not going to do dumb deals," English states.
Forces aligning?
The financial discipline seen in 2004 should continue in the coming year, other vendor executives and industry observers predict. However, market forces are converging to bring a new urgency to consolidation.
The Bush administration has made it clear that the health care industry must develop a national health information network, including an electronic medical record for each person.
While the administration presented a framework for a national network and made health care I.T. a campaign issue in 2004, presidential challenger Sen. John Kerry (D-Mass.) said little on the subject and presented no concrete proposal. Consequently, many vendors were hesitant to make acquisitions to support a move toward a national network because Kerry's support for the initiative was not clear, says Gene Mannheimer, senior research analyst at Roth Capital Partners, a Newport Beach, Calif.-based investment firm.
But now that the Bush team is back for four more years, interest in electronic medical records vendors is growing. "The political climate suggests electronic records activity will increase," says Jason Baker, director of business development for Cerner Corp., a Kansas City, Mo.-based vendor of clinical information systems.
Cerner recently bet $100 million on that suggestion. The company late in 2004 acquired the medical division of VitalWorks Inc., Ridgefield, Conn. The division primarily sells electronic medical records and practice management software to physician practices, serving about 30,000 physicians.
The acquisition gives Cerner a footprint and institutional knowledge in the independent physician practice marketplace, says John Dragovits, vice president. Further, serving both the hospital and physician communities will help Cerner become a player in regional health information networks, he adds. The White House envisions such networks as the foundation of a national network.
Besides entering the physician arena with the VitalWorks unit, Cerner broke from its tradition of making small, niche acquisitions. "It is a bold move for Cerner, but whether it proves to be successful remains to be seen," contends Benjamin Rooks, a director in the Chicago office of Shattuck Hammond Partners, an investment banking firm.
Rooks sees VitalWorks' medical unit as a "roll-up" of disparate products from multiple acquisitions. "Cerner always avoided a roll-up, now it's bought one," he says. "Managing roll-ups is not something Cerner has done; it was one of the attractive points about the company."
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