Healthcare Reform Spurs Health IT Mergers

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The mergers and acquisitions market has been very robust in healthcare generally and in health IT in particular, said Jonathan Krieger, managing director for healthcare investment banking for Berkery Noyes, an investment banking advisory firm, in an interview with InformationWeek Healthcare.

Krieger attributed this M&A activity primarily to healthcare reform, which is forcing the $3 trillion industry to change its business model. "Companies that have figured out how to succeed in this new paradigm, and those companies that have supplied health IT solutions to address the changes that are occurring, are doing well. And investors perceive this as a huge opportunity. Any time you have change in industries, it presents opportunities for companies that come out with software solutions to address those changes."

Berkery Noyes recently released a report that analyzed M&A activity in the information and technology companies that serve healthcare providers, health insurers and pharmaceutical companies. The researchers found that in the first half of 2013, deal volume declined 16% to 157 deals, down from 188 in the second half of 2012. Transaction value increased 58% to $8.03 billion from $5.08 billion in the second half of last year. But if BC Partners' announced acquisition of Springer Science & Business Media was excluded, transaction value would have dropped 29%.

A large part of the reason for these decreased numbers, Krieger explained, was the rise in the capital gains tax rate on Jan. 1, 2013. Because of that, he said, "You had a lot of private sellers looking to sell their companies and close in 2012 so they could pay less taxes on the proceeds from the transaction."

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As a result, there were fewer companies for sale in the first half of this year, creating "pent-up demand," said Tom O'Conner, another Berkery Noyes managing director, in a news release. "The M&A environment should stay attractive for [health IT] sellers who are considering a liquidity event in 2013 or 2014, and high-quality assets of scale will continue to command healthy valuations in the near term."

Krieger noted that both strategic acquirers, which are companies in the same field, and financial acquirers -- private equity firms -- are vying for health IT acquisitions. Some of the hottest areas include health information exchange, as exemplified by Allscripts' acquisition of dbMotion, and analytics, which have become more important as provider organizations try to manage population health.

The median multiple of revenue to value is higher in health IT than in most other industries "because the healthcare industry is changing so quickly and is such a large market," Krieger said. While individual companies in other industries may have high multiples, more health IT companies do because of the market opportunities that investors see.

Among the segments covered in the report, health IT M&A activity was the strongest, accounting for 63 (or 40%) of the reported transactions. Ranked below health IT were healthcare business services, consumer health, medical information, medical education, pharmaceutical IT, pharma business services and pharma information.

The top 10 M&A deals among the companies tracked by Berkery Noyes in the first half of 2013 included the Springer acquisition, valued at $4.4 billion; Roper Industries' purchase of Managed Health Care Associates for $1 billion; the Allscripts buy of dbMotion; Athenahealth's purchase of Epocrates; and N. Harris Computer Corp.'s acquisition of EHR vendor Quadramed.

Asked whether he's seeing the long-anticipated consolidation of health IT vendors, Krieger said, "EHR vendors that have not been acquisitive in the past have all been very acquisitive over the past 12 months. Allscripts, for instance, has made 3-4 acquisitions. And a lot of smaller vendors are getting acquired or are not succeeding at the levels we've seen in the past. There are a lot of EHR companies out there, and many don't differentiate from one another. But the few companies that are growing quickly are the ones that are getting acquired."

Nevertheless, he added, he's seeing more firms acquiring other companies that "build out their product suite" than companies buying competitors to increase their customer base.

"The customers of healthcare IT providers have made it clear they want to reduce the number of vendors that they're working with," he pointed out. So vendors are buying firms that enable them to offer one-stop shopping to healthcare organizations across the healthcare continuum.

Venture capitalist investments in startup health IT firms have been growing faster than mergers and acquisitions among mature companies. According to Mercom Capital, health IT companies raised nearly $500 million from VCs in the first quarter of 2013. The number of VC deals jumped to 104 from 51 in the previous quarter and 30 in the prior-year period.