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Vendor Consolidation: The Wait is Over


By Joseph Goedert, News Editor January 2006
The health care information technology industry in the past year saw its first significant merger and acquisition activity since a frenzy of consolidation ended in 2000.

A year ago, an industry observer summed up 2004 as "a year of a lot of tire kicking" with vendors getting ready to buy but not pulling the trigger. But some of those triggers now have been pulled, and vendors and their customers can expect consolidation to continue, experts say.

"Over the past six months, there's been a decided increase in activity," says James Giordano, president and CEO at CareTech Solutions Inc., a Troy, Mich.-based consulting firm. "There is an uptick in the economy and stock prices are up, making it easier to buy."

The past year saw more acquisitions-and at more favorable prices for sellers. Further, Waukesha, Wis.-based GE Healthcare's buy of Burlington, Vt.-based IDX Systems Corp. was the first billion-dollar deal in five years.

Health Data Management tracked at least 55 deals in 2005, up from 43 in 2004.

The impetus behind the consolidation trend is the fact that many health care organizations want to consolidate the numbers of vendors they do business with.

The effort to build a national health information network-anchored by regional health information organizations-has put a premium on information systems interoperability. To ease the task, providers are looking to reduce the number of disparate systems in their organizations, says Randall Lipps, chairman, president and CEO at Omnicell Inc., a Mountain View, Calif.-based vendor of ancillary information systems. As a result, "hospitals want to buy a total solution from a single vendor," he adds.

This means vendors need to broaden their portfolios fast, and many feel the only way to do so is via acquisitions. "You can't effectively grow business today without acquisitions," Lipps contends.

That's why Omnicell, which struggled through much of 2005, expects to seriously consider being an active buyer in 2006 as its finances improve. But Lipps acknowledges the tables could be turned with Omnicell-best known for its medication management technology-being the seller.

"Any vendor that is a public company is for sale," he notes. "There's been a lot of interest in the past about Omnicell. We resisted because it didn't make sense, but it's my view that valuations are getting higher."

Higher valuations means sellers can command higher prices than in past years. And some of the prices seen in 2005 were surprisingly high.

Online supply vendor Neoforma Inc., for example, has a history of financial losses but sold to rival Global Healthcare Exchange for $200 million. Philips Medical Systems paid $280 million for picture archiving and communication systems vendor Stentor Inc., which expected 2005 revenue of about $50 million. That's a huge multiple, but a smart move for Andover, Mass.-based Philips, says Vishal Wanchoo, president and CEO at rival firm GE Healthcare's Information Technologies subsidiary in Barrington, Ill. "Clearly, they had to have their own PACS," he adds.

PACS were a hot item in 2005 with at least six vendors selling. Among those deals, McKesson Corp. paid $105 million for Medcon Ltd., which had 2004 revenue of $17 million. Orthopedics vendor Stryker Corp. paid $50 million for eTrauma.com, with $18 million in revenue in 2004. Agfa Corp. bought technology partner Heartlab Inc. for $132.5 million, more than four times revenue. Mercury Computer Systems Inc. paid 2.3 times revenue for Germany-based SOHARD AG.

Prices paid for PACS vendors may have been high, but many of these companies were growing rapidly, notes Gene Mannheimer, senior vice president of research at the San Diego-based investment firm Caris & Company. "PACS vendors are growing revenues at 40% to 50%, hence the high multiples paid."

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