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.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  2. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  3. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  4. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  5. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  6. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  7. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  8. Investing

    A Look at 6 Leading Female Value Investors

    In an industry still largely predominated by men, we look at 6 leading female value investors working today.
  9. Term

    What Is Financial Performance?

    Financial performance measures a firm’s ability to generate profits through the use of its assets.
  10. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  1. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  2. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  3. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  4. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  5. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  6. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!