Earlier this week, Thomson Reuters (TR) announced that it intends to sell off its healthcare unit. A logical first response is: What they heck, why would they sell right now when the healthcare market is so hot and shows no signs of letting up? Thomson Reuters is a well-respected brand in healthcare and as healthcare organizations (providers and payers) of all sizes look to more effectively run their operations, TR’s portfolio of healthcare solutions are well positioned.
This isn’t the first time they have tried to sell-off their healthcare unit (tried once before back in late 90’s), but it may be the most opportune one.
Looking more broadly at the entire TR portfolio, the healthcare unit sticks out like a sore thumb. Thomson Reuters is an international company and the vertical market services (legal, financial, etc.) they provide are leveraged horizontally around the world. The Thomson Reuter’s healthcare unit, however, is structured to serve the unique characteristics (3rd party payer system) of the US market a characteristic not commonly found elsewhere. There is not an international leverage opportunity for TR with their healthcare operations, thus from a strictly business is business point of view, selling off the unit when the market is hot makes a lot of sense.
In 2010, revenue for this unit was roughly ~$450M with good margins approaching 20%, so the potential sale price won’t be cheap (in excess of $1B is not out of the question) and this naturally limits the field of possible suitors. Following are a few likely suitors, a probability ranking, why they might make such a move as well as why they may sit this one out.
Why: As healthcare reform restricts the margins that payers can make on their insurance business, publicly-owned health insurance companies such as Aetna need to look elsewhere for growth opportunities to increase shareholder value. Aetna has ActiveHealth that combined with their recent acquisition of Medicity makes for a nice potential play in the ACO market. Key pieces missing in their portfolio are analytics and content, both core attributes of TR Healthcare. Nice synergies, nice fit and Aetna is not shy about making software acquisitions and is one of the more forward thinking, software savvy payers in the market.
Why Not: The Medicity acquisition was significant at some $500M and taking on another significant acquisition may be more than they can handle right now. Is the company prepared to double up on its HIT bet and pick-up TR Healthcare? Hard for us to think of any reasons why not and see Aetna as a leading contender.
Why: Dell is making a pretty big push into the healthcare sector having acquired services firm, Perot, cloud imaging archive service InSite One and forming a partnership with Microsoft to deliver the Amalga platform in the “cloud” for their customers, who are primarily community hospitals running Meditech. Adding the TR portfolio, and serving it up in the cloud could be a very attractive proposition for this company, which is almost entirely focused on the US market.
Why Not: It will take some significant work on Dell’s part to get the TR healthcare portfolio into a package that can be delivered from the cloud. There is also the small issue that much of the TR portfolio is built on Oracle database technology and Dell is pretty much wedded to the MSFT stack, including SQL.
Why: GE Healthcare and TR having been working together for over a year on combining clinical datasets and analytics for comparative effectiveness research and announced the results of that collaboration the end of last month. GE is also looking to expand beyond its present confines of Centricity and combining TR Healthcare with its existing eHealth activities could boost its presence and provide a gateway into numerous TR accounts.
Why Not: GE has its hands full trying to right the ship of Centricity and making a major acquisition may be seen as a distraction. Also, GE and its Healthimagination effort is global in scope and TR Healthcare’s US focus does not align with that broader vision.
Now there are certainly a number of other potential acquirers but for a number of reasons we just don’t see them pulling the trigger on this acquisition, but then again… They include:
Large service firms (Accenture, CSC, Deloitte, etc.):
These companies by and large get paid on billable hours and not software, unless of course they are building some custom solution like Harris did for the feds (the less than stellar NHIN CONNECT) and even in that case it was more a billable hours exercise. No, TR’s healthcare business is too far afield from the traditional business model of these firms.
Large, multi-state healthcare organizations (HCA, VHA, Premier, etc.):
Sure, some of what TR owns was developed by such large healthcare organizations but the value in this acquisition, which will be factored into the price, is the ability to leverage this portfolio of solutions across the entire US healthcare market. Numbers likely do not work for one of these entities as the scope of deployment is too limited.
Large multi-state Payers (Cigna, Humana, WellPoint, etc.):
Aetna and United Health Group (UHG) are placing bets on healthcare IT, the rest of the payers are looking elsewhere (e.g., WellPoint’s acquisition of CareMore). Too much overlap with existing products in UHG’s OptumInsight portfolio so they are out as well.
Large EHR companies (AllScripts, Cerner, Epic, etc.):
Each EHR vendor has their own reasons for not making a bid. It would require either a visionary, or absolutely crazy move (but honestly not much separation between visionary and crazy) on their part for this to happen. Loads of risk, chances extremely slim.
IBM: Don’t see the synergies with acquisitions they have made to date. Besides, much of TR’s portfolio runs on top of Oracle.
Microsoft: See IBM
Oracle: This may be the dark horse. Oracle has been on the periphery of healthcare, is trying to make in-roads in HIE (less than successful) and is a very acquisitive company (basically their entire enterprise software application group was acquired). Also, as mentioned before, TR’s solution portfolio is built on Oracle.
There is also the possibility that Thomson Reuters corporate will find that the market may not be willing to pay what they think this division is worth and as they did in 1997, simply hang on to it for after all, it is generating positive cashflow.
Great analysis. Any thoughts about McKesson or Optimum Insights (formerly Ingenix?
McKesson is definitely a possibility as they could leverage the TR portfolio over several lines of business. As for UHG/Ingenix now OptumInsight, believe there is too much overlap in respective portfolios for this to work.
I agree with Market Observer. Ingenix seems to be a likely candidate. They have the cash to spend and good reasons for the acquisition.
Andrew, not sure about the reasons as to why UHG would acquire TR, from this vantage point, appears to be to much overlap in solution capabilities leading to cannibalization.
Thanks, John. I apologize. I should have been more specific. My reasons were these;
The TR project is more capable and is generally held in higher regard than Ingenix solutions
UHG has enough money that making the acquisition so someone else does not might make sense
These are flip reactions though. I have no data to back it up. Just sharing my thoughts.
Just don’t see how UHG could get past anti-trust concerns in acquiring the Thomson Reuters Healthcare unit – far too much overlap. But I bet UHG would love nothing more than to take this competitor off their screen via acquisition. If they can figure out a way to get beyond those anti-trust concerns, agree, UHG is definitely in the hunt.
Great post John!
Assessment is on the mark!
I think of it as an instant cash out (BIG multiples) opportunity on the HIT investment craze!
I might add the following…
Health care svcs might bite, (a PBM, McK, InVentiv, etc) SAS may be interested, a CRO looking to broaden portfolio, private equity picks it up or they spin it out as a stand alone and keep some equity… Wide open!
Not so sure HC services will bite on this one. Someone like IBM could fold it in on the software side and let PWC leverage the services, but that is about the only possibility I see. McK is possible, CRO maybe, but a stretch.
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What about Covisint? Overlap in the Regional Health Exchange, and other products align well.
You guys don’t mention Verisk Analytics – a competitor of Thomson. I believe they use Thomson for the back end of their analytics services/product. It might make sense if they can afford it and it would complement their analytics focus and allow them to grow beyond current focus which seems to be in the employer space (with their D2 hawkeye acquisition). Thoughts on that?
[…] John Moore who blogs over at Chilmark Research has posted two blog notes about this news (see: Likely Suitors as Thomson Reuters Exits Healthcare; also see Additional Thoughts on Thomson Reuters). Here's an excerpt from the first of […]
Curious to know what’s the latest scoop on this?
Haven’t heard anything yet on future fate of TR Healthcare business unit, Reckon TR wants a princely sum and those with the resources to buy this asset are few and far between.
[…] at some point. We are seeing rationalization on valuations (e.g., no one was willing to pay what Thomson Reuters wanted for their healthcare business unit despite there being a sizable number of bidders) and this […]
More insights on this John?