Allscripts + Eclipsys = A Deal That Makes Sense

By Stephen D. Simpson, CFA | June 08, 2010 AAA

A disturbing number of corporate M&A transactions end up being disappointing wastes of time and shareholders' money. In fact, I would go so far as to say that a lot of deals are about executive ego, hiding an inability to grow organically, or simply giving institutional shareholders the illusion that management is "active".

I am putting all of that aside today. I actually do think that the combination of Allscripts (Nasdaq:MDRX) and Eclipsys (Nasdaq:ECLP) is one that makes a lot of sense. Accordingly, this may be one of the relatively rare deals that actually benefits all parties involved.

Tutorial: The Basics Of Mergers and Acquisitions

The Players
Allscripts is already one of the larger players in healthcare IT, with an impressive array of electronic healthcare record management, e-prescribing and practice management software packages. All told, Allscripts has about 160,000 physicians as clients, as well as about 800 hospitals and 8,000 post-acute facilities (like nursing homes and hospices)

Eclipsys is slightly different. First, Eclipsys is more concentrated than Allscripts, as nearly 40% of its revenue comes from about 20 customers and a single hospital customer accounts for more than 10% of its revenue base. Still, the company has good penetration in top hospitals, and boasts enterprise solutions that serve both the clinical and business needs of customers in the hospital market. (For more, see A Checklist For Successful Medical Technology Investment.)

The Combination
This deal will see Allscripts buying Eclipsys in a $1.3 billion stock deal where Eclipsys shareholders get 1.2 Allscripts shares and a roughly 19% premium. Once combined, the two companies will boast a client base of about 180,000 physicians, 1,500 hospitals and more than 10,000 post-acute sites.

Not only does this deal provide scale, but it looks like there should be real synergies. Eclipsys adds a big acute care business, and that is an area where Allscripts was relatively weak. All said, there does not appear to be a large amount of overlap so it should allow customers to benefit from "best of breed" across the combined platform. That said, there will be an integration process and that could create delays in new product introductions and other transition issues that could temporarily expose the company to its competitors. (For more, see What Makes An M&A Deal Work?)

The Landscape
Healthcare IT has been an attractive market for quite some time, but seems to have plenty of room to run, as some estimates indicate market penetration in the area of 10%. As you might imagine, there is no shortage of players in the space.

Cerner (Nasdaq:CERN) is already a major player in the space, and one that is transitioning from its historical focus on hospitals to physician practices. Not only does Cerner boast a sizable foreign business, but its software-as-service offerings reduce the upfront costs to customers (likely an attractive feature for physician practices).

There are additional major players with their eyes on this market. General Electric (NYSE:GE), Siemens (NYSE:SI) and Oracle (Nasdaq:ORCL) all have some measure of interest in the space and sizable marketing assets to wield. On the smaller side of the market, Athenahealth (Nasdaq:ATHN) has posted strong growth so far with its web-based revenue management products and is trying to build its business in medical records.

Bottom Line
With this announced acquisition, Allscripts' majority shareholder Misys (a British software company) will be reducing its stake from 55% down to about 10% . That could put a ceiling on the shares and represents a risk to the deal. This is because if Misys is stymied in its plans, it could impair Allscripts' deal. What's more, there are the above-mentioned competitors waiting to exploit the inevitable turbulence that will result when the two companies combine forces. Despite all this, this is still a deal that makes sense and one where I think both shareholder groups can benefit in the coming years.

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