Cognizant’s Healthcare Acquisition

DEAL/TRANSACTION:

Cognizant struck its largest deal to date, $2.7 billion in cash to buy US-based TriZetto from primarily owned by private equity group Apax. BlueCross BlueShield of Tennessee and Cambria Health Solutions, both minority shareholders, will also sell their stakes. Cognizant intends to finance the transaction through a combination of cash and debt and has secured $1 billion of committed financing in support of the transaction. The transaction is expected to close in the fourth quarter of 2014

COGNIZANT :

Cognizant is a leading provider of information technology, consulting, and business process outsourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 75 development and delivery centers worldwide and approximately 187,400 employees as of June 30, 2014, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world. Cognizant Technology Solutions just bought TriZetto as it looks to build up its healthcare technology services.

With approximately $2.5 billion in annualized revenue, Cognizant’s Healthcare practice is consistently ranked among the top 10 on the Healthcare Informatics Top 100, Cognizant serves 28 of the top 30 global pharmaceutical companies, 16 of the top 20 health plans in the U.S., 4 of the top 5 pharmacy benefit management companies in the U.S., 9 of the top 10 biotech companies, and 12 of the top 15 medical device companies. With a large team of dedicated professionals including doctors, pharmacologists, physicians, biomedical engineers, pharmacists, biostatisticians, medical writers, and GxP consultants, the practice provides domain-aligned consulting, IT, business process and analytics solutions globally.

TRIZETTO :

TriZetto Corp. is based in Englewood, Colorado. TriZetto, a provider of healthcare information technology software and solutions, was owned primarily by private-equity firm Apax Partners. TriZetto Corporation provides world-class information technology and service solutions that help payers and providers work more efficiently and collaborate to deliver better health. Working with more than 350 health plans, TriZetto solutions reach nearly 245,000 care providers. TriZetto helps healthcare organizations enhance administrative efficiency; improve the cost, quality, and delivery of care; address compliance; and compete to win in an emerging retail market. Payer solutions include benefits administration, care management, network management and portal platforms, as well as consulting, application management and business management services. Provider solutions include real-time eligibility assurance, claims editing, revenue cycle management technology, and services that help providers get paid quickly and accurately. Currently, serves more than 200 clients including 16 of the top 20 US health plans and four of the top five pharmacy benefit management companies. TriZetto was built up through about 16 acquisitions in the last 15 years.

WHY ACQUISITION?

1. Cognizant and TriZetto have had a long-term relationship, having jointly served a number of healthcare clients to date, so the integration will be easily accomplished;
2. A combined entity will have more healthcare revenue while serving 245,000 health-care providers and payers who cover about 180 million people in the U.S. and it will also serve about 350 healthcare plans which will enable Cognizant to differentiate itself in the US healthcare market;
3. It expects the deal to be immediately accretive to earnings (excluding one-time costs and adjustments);
4. The companies are looking to integrate an array of services, with three core focuses: traditional information technology services; businesses such as consulting and IT infrastructure; and delivery models still in development and expect about $1.5 billion in potential revenue synergies over the next five years;
5. Healthcare accounts for 26% of Cognizant’s revenue. Adding on TriZetto will help the company build up its revenue in the healthcare sector even further. Positions Cognizant to cash in on an industry that currently represents 17% of U.S. gross domestic product;
6. To integrate across traditional IT services; high-growth businesses such as management consulting, business process services and IT infrastructure services and emerging delivery models;
7. Trizetto has 3,700 workers which will join Cognizant’s existing healthcare information technology business;
8. TriZetto already runs a streamlined organisation; so this acquisition is all about opportunity and growth, not cost reduction. As such, there are no layoffs planned
9. The acquisition will enable a lot of cross-selling in business process outsourcing and software and will make Cognizant a strategic healthcare services vendor to many more clients
10. The acquisition is timely for Cognizant, coming as it does in the aftermath of the landmark legislation known as Obamacare. The company provides services such as claims processing, billing and call center operations to insurers, hospitals and some state-run healthcare exchanges set up under President Barack Obama’s Affordable Care Act.

VALUATION:

The valuation of TriZetto looks “quite inflated”, such a valuation is not uncommon in the products and platform space for a company targeting a niche segment. If Cognizant was paying such a high valuation for a pure-pay services company, it would have been worrisome. But a four to five times valuation 2013 revenues of an estimated $676 million for an intellectual property (IP) -related company in the US is normal and also much lower when compared current TCS which gives 6 times of the revenue of the healthcare (i.e. TCS current Market cap for Healthcare business comes to $57million for revenue generated from healthcare of $9million) Whereas TriZetto was acquired by Apax, a London-based private-equity firm, for $1.19 billion in 2008 and exit by them is at the good value.

And Cognizant will borrow for the first time ever to fund the buyout, so the management is quietly confident that the acquisition will create much higher value than it paid to the Apax.

POSITION :

Comparatively, India’s largest IT services provider Tata Consultancy Services Ltd ( TCS ) reported 6.3% of its June quarter revenue as coming from healthcare and life sciences, out of total revenue of Rs. 22,111 crore in the same period. HCL Technologies Ltd reported 0.9% of its June quarter revenue of Rs.8,424 crore from life sciences and healthcare. Wipro Ltd said 10.8% of its total June quarter revenue came from healthcare, life sciences, and services. Its revenue for the quarter ended 30 June was Rs.11,136 crore. Infosys Ltd reported 1.9% of its revenue as coming from healthcare in the same period on total revenue of Rs.12,770 crore.

The US healthcare market has been a target for all the major IT services exporters, which has been triggered by Obamacare and the huge opportunity for digitizing health records. This acquisition will help Cognizant gain a sizeable foothold in the US healthcare market, where it already holds a dominant position compared to its peers. Cognizant’s grip on the segment will increase further, leaving behind peers like Wipro, Infosys, and Tata Consultancy Services.

MARKET MOVEMENT:

Shares of Cognizant Technology Solutions Corp. rose $1.33, or 3 percent, to $46.09 in premarket trading.

CONCLUSION :

With this acquisition Cognizant has a stronger footprint in the US IT healthcare market, tipped to touch $22.6 billion by 2017, driven by opportunities from Obamacare. This acquisition will give it a cutting edge in the healthcare vertical, where it competes with global biggies like IBM and Accenture, at a time healthcare corporations are keen to cut costs and also help to grow revenue which is struggling. Cognizant move to acquire Trizetto is a good move and it will create value for all the stakeholders.