Healthcare IT M&A Remains Resilient

We have all seen the recent headlines: US M&A volume dropped 38% in 2008 and transaction values are down 24% from 2007. Other statistics and headlines are equally gloomy. By nature, I am an optimist so I look for the silver lining in things. Perhaps this is why I have chosen to focus more on the healthcare IT sector (“HCIT”), which has statistics that offer promise of better days ahead.

Although not immune to the current financial crisis, HCIT continues to show resiliency: Deal volume is up 3.2% from a year ago (224 vs. 217 announced deals), but more importantly, 2008 median revenue multiples have expanded to 2.1x from 1.9x in 2007, and 2008 median EBITDA multiples have increased to 17.2x from 13.5x in 2007 (source: Capital IQ). It is worth taking note that it is taking twice as long to get these deals done. Today, the average M&A timetable is up to six to eight months vs. the traditional three to four months it took to run a full deal process in the past.

Now, what’s driving HCIT to live up to its defensive reputation? The reality is that consumer spending constraints are expected to reduce healthcare spending across sectors, specifically discretionary provider budgets, creating challenges within several HCIT segments such as relationship management (e.g., health info exchange, personal health info systems, etc.). That said, HCIT is being driven by a mix of healthcare industry trends (consumerism, aging population, rising costs, medical errors, etc.), federal/state government resolve, demographic shifts, and payer funding. Government and payers are working hard to overcome lack of standards, negative financial incentives, and physician reluctance. Competitive incentives are fueling robust demand growth in physician-and-health plan-focused HCIT companies. Long-term, data-mining capabilities potentially provide value-added products and services such as care management (next gen disease management), intelligent benefit design, and provider service optimization. 

The Bush administration laid much of the groundwork for the Electronic Health Records program, leading to several pilot programs in a handful of states, including standardization efforts of medical records. Given the bipartisan support, a Democrat controlled Congress should make healthcare IT legislation in 2009 much more likely. President Obama has proposed spending $10B annually for five years to improve IT adoption by healthcare providers. This stimulus amount is significant relative to the estimated $22B that healthcare providers were projected to spend in 2008. President Obama’s timeframe of computerizing all health records within five years is ambitious and aggressive. The ability to track data on patients and provide cross-communication for providers within health care systems is a must for increasing patient safety and slowing the rise of healthcare premiums, and it will certainly ultimately result in potential operational savings.

This growing and attractive market opportunity has prompted several large firms to expand their HCIT presence: 3M, Cisco, EMC, GE, Google, IBM, Microsoft, Phillips, and Siemens are a few of the players whom I see taking advantage of the HCIT arena. In the coming year, I predict you will see more HCIT companies evaluating their growth plans and strategic priorities, and asking themselves if they are better off going at it alone or teaming up with one of the larger players in the field. Although financing conditions are now considerably more challenging, we are certainly not seeing the end of HCIT M&A. I remain optimistic and believe that in 2009 and 2010, there will be a number of well-planned takeovers in this sector.

Zeke Navar is a Principal at Covington Associates. He can be reached at 617-314-3950 or ibankerblog@covllc.com.