November 5, 2007

1. CSC To Acquire First Consulting Group

Facts and Background

Computer Sciences Corporation of El Segundo, CA announced Wednesday that it would acquire First Consulting Group of Long Beach, CA for $365 million in cash, a premium of 30% to the share price at the time of the announcement. FCG has 2,500 employees, half of them in India in Vietnam, and annual revenues of $264 million.

Opinion

FCG is just about the last big independent healthcare consulting firm to be bought out, following Superior Consultant, Healthlink, and others. They were one of the better ones at one time, but had tried to reinvent themselves as a life sciences consulting company with cheap overseas development centers. Given their struggles, the purchase price was actually fairly high.

Musings

• At least one law form is planning to file a class action complaint, claiming that the buyout price is inadequate. That tells you a lot about their motivation. Who in their right mind thinks FCG is worth even the pre-announcement share price?
• FCG was doing a lot of freely available work for the California Health Care Foundation. It was actually pretty good, although not all that groundbreaking.
• It seems obvious that FCG's overseas centers made them interesting to CSC.
• Consulting companies don't sell for much in rational times.

2. Microsoft Buys Thai Hospital Applications Vendor

Facts and Background

Microsoft announced on Monday that it was buying the assets of Global Care Solutions Ltd., a Thailand-based healthcare applications developer. The company's products were developed in conjunction with medical tourism hospital Bumrungrad International Hospital.

Opinion

Microsoft's vertical applications dabblings haven't done much (Great Plains, for example). It's a mystery why a 70-employee software developer with a handful of customers, all of them in Asia, would interest Microsoft.

Musings

• Microsoft's application partners can now look at them as a competitor at HIMSS. It's always tough to provide tools to development vendors and also compete with them on application sales.
• Microsoft's main requirement for such acquisitions seems to be the exclusive use of Microsoft's development and database products, just like their Azyxxi acquisition.
• Strangely enough, Microsoft isn't exactly buying the company, according to the press release, just intellectual assets and all of its employees. 

3. Perot's Cancelled Triad Contract Leads to Big Layoff

Facts and Background

Consulting firm Perot Systems of Plano, TX announced Q3 revenue that fell short of expectations on Wednesday, after big customer Triad Hospitals cancelled its contract due to its merger with Community Health Systems, which wants to run its own IT shop. Perot said it would lay off 650 of its 22,000 employees and warned of lower Q4 earnings, excluding Triad's $45 million early termination fee.

Opinion

That's the trouble with big contracts. The outsourcing pendulum is always swinging as companies first love the idea of getting out of non-core functions, then realize that the new company can't make a profit without cutting services. Just about every consulting company finds itself the victim of a high-profile customer cancellation, although at least in Perot's case, it wasn't over the quality of its services.

Musings

• The stock dropped to near a 52-week low on the news.
• If Perot was thinking about shipping jobs overseas (see: FCG), then the Triad contract might have given them a good excuse for layoffs.
• Perot's management mentioned the "challenging" healthcare environment. Consulting firms do best when cash-flush customers are willing to pay a premium to have someone else do their jobs. No one disputes that healthcare IT will be busy, but customers buy consultants with discretionary cash.
• The conference call didn't offer much information about fourth quarter expectations. Since companies usually are overly optimistic in describing their prospects, this may signal major problems to come.

4. Wall Street Likes athenahealth's First  Post-IPO Earnings Report

Facts and Background

Physician billing vendor athenahealth announced Thursday that its Q3 revenue was up 33% over last year, with earnings per share of $0.06 vs. a loss of $0.41 last year. Shares closed up nearly 11% on Friday.

Opinion

The company has had a great run, starting with its September 20 IPO. Shares are up 133% since then. The young company's market cap is well over $1 billion.

Musings

• Investors love the idea of free software that powers a physician billing service that customers pay for as a percentage of billings.
• athena's success is sure to encourage new competition. You can bet that someone is plotting a similar product right now.
• athenahealth took the less-popular IPO route instead of looking to private equity.
• The company now has to meet Wall Street's lofty expectations, which is more a function of management and results than of ideas and growth.

5. Philips Announces Plans to Unload MedQuist

Facts and Background

Royal Philips Electronics of the Netherlands announced Friday that it would seek a buyer for its 70% share of transcription vendor MedQuist and take a fourth quarter charge of $462 million, claiming it's not a core business. MedQuist, of Mount Laurel, NJ, provides transcription services to 1,500 hospitals and has 8,000 employees. The company is under SEC investigation for its billing practices, the Department of Justice for alleged labor law violations, and the Department of Labor for its retirement plan administration..

Opinion

Non-core business: one that was racked with just about every possible financial scandal right after you paid way too much for it.

Musings

• Philips paid $1.2 billion for 60% of the company in 2000, later adding on another 10%, for a total investment of $1.7 billion.
• MedQuist has churned through a variety of experienced healthcare IT people hired to save it. Tim Stack, CEO of Piedmont Medical Center, lasted only 69 days as MedQuist's CEO in late 2003 before high-tailing it back to Piedmont, right around the time a whisteblower charged the company with improper billing.
• Philips said in 2004 that its MedQuist stake was worth only $350 million after taking a $752 million charge.
• Nuance Communications is buying everything in sight and is centered around speech recognition and dictation (it bought the former Dictaphone). Smart money says they're keenly interested, although the nuisance of a long future of dealing with a variety of federal investigations can't be encouraging.
• The good news is that Philips seems to be willing to sell cheap. Justifiably.

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