Cerner To Buy Siemens Health IT Business For $1.3 Billion

The deal, which values the Siemens business at slightly more than one times sales, will increase Cerner’s annual revenue from about $3 billion last year to more than $4.5 billion of annual revenue this year. The combined company will have 20,000 associates in more than 30 countries, and 18,000 facilities that will be clients.

“We think scale is important,” says Patterson, who founded Cerner in 1979 at his kitchen table. “We were the largest IT company, but this gets us a bigger, better business platform. We’ll have a combined $650 million [in research and development] spend and we think the future of healthcare computing is driven around the ability to innovate. This kind of preserves our ability to spend heavily in innovation and IT certainly for the rest of this decade.”

The scale and financial heft will help Cerner continue to compete with existing rivals like Epic Systems, which is becoming a dominant force in the health information technology space, AthenaHealth, and AllScripts, as well as new businesses like NantHealth and Flatiron Health that are aiming to capture some of the very areas of analyzing big data sets where Patterson sees growth for the industry.

HISTalk, an Website dedicated to health care IT, reported on rumors of the acquisition back on July 22. Michael Cherny, an analyst at ISI Group, commented on that report:

What are the financial merits of a potential deal?

CERN’s cash position provides it with a very low cost of funding (CERN could fund the entire acquisition with cash), so the financial merits of the deal are quite meaningful. Assuming the low end of the $600-$700 MM of revenue for the company and growing it by ~5% into FY15/FY16, along with assuming that Siemens margins are roughly in-line with McKesson’s (we view as a decent proxy for profitability given the more mature nature of both businesses), our rough estimates call for at least 10% accretion for FY16, assuming modest synergy targets (2% of EBIT for FY15 and 5% of EBIT for FY16). Our rough PF EPS estimate for FY16 approaches ~$2.50 vs. our current standalone estimate of $2.26. If CERN decided to use some debt to fund the deal, the accretion is still meaningful, although we estimate that every $100 MM of debt used would reduce the accretion by ~$0.01.

What are the strategic merits of a potential deal?

While the financials make clear sense, the strategic rationale is a bit more interesting. On the positive side, CERN would be bolstering its installed base with a large group of hospitals that represent an attractive conversion and upsell opportunity over time. This is of particular importance as CERN expands its newer solutions, such as broader outsourcing arrangements through ITWorks and RevWorks as well as its population health management solutions. Additionally, Siemens’ Soarian Financials product provides CERN with another strong revenue cycle platform, an area that has displayed meaningful growth for CERN following noted investments (had long been an underperforming segment for CERN, although recent momentum has been strong). Finally, acquiring Siemens would box out other players who are trying to build out their inpatient solutions, particularly companies with little to no presence in the market that could look to an acquisition to “buy a footprint.”

However, the deal would not be without its share of risks. For one, CERN has been vocal about its recent share gains at the expense of other players, averaging more than 30% growth in bookings from outside its installed base over the last 3+ years. Therefore CERN may have the opportunity to compete away some of this business over time, although the certainty of that is unclear. Additionally, while we do not know the exact growth rates for Siemens, we can assume that total growth at Siemens is slower than CERN since it has led to a potential sale of the underperforming asset. We estimate that acquiring Siemens, without assuming cross-sell opportunities, could slow CERN’s overall top-line growth by ~100-150 bps, although our estimates would still put growth comfortably in the double digit range.

I asked Patterson to respond to each of Cherny’s two points: first, that Cerner would have captured a lot of this business anyway without paying, and that Siemens could act as a drag on Cerner’s growth rate. “Certainly we would have captured some of this business over the next ten years. We would not have captured all of it,” Patterson says. As far as growth goes, of course it is harder to grow a bigger business. “We still see a very good opportunity to grow that larger number at double digits going forward after this transaction. ”

Another, more pointed question: couldn’t managing this new business be a distraction? As Patterson says: “
The next [thing] in healthcare is really population health, being able to, through big data to be able, identify and manage health conditions before people present themselves to hospitals and emergency rooms. We think there is a whole system above the current system.” Can he really focus on that new system while integrating a business that is very much based on the old system?

“I don’t think it’s a distraction because we know how to run this business,” Patterson says. “What we’re acquiring is something we understand very well. There is from a financial point of view this is not heavy lifting, this is a very good deal… Will it slow us down for our innovation and development? I looked at that very hard. I’m very comfortable this is not going to slow us down.”