Athenahealth (NASDAQ: ATHN) – market cap as of 11/22/2018: $5.36bn

Introduction

On the 12th of November 2018, private equity firm Veritas Capital and hedge fund Elliot Management announced their plan to buy Athenahealth Inc. for $5.7bn in an all-cash deal. The deal values Athenahealth at $135 per share, thus offering a 12.2% premium compared to the stock’s closing price on Friday. The announcement marks the end of a long, contentious process to force the sale of Athenahealth by activist stakeholder Elliot Management. In May of this year, Elliot Management unsuccessfully made an unsolicited offer of $160 per share to buy the health records company one year after acquiring a 9% stake in the firm. Following the close of the acquisition, co-buyer Veritas Capital intends to merge Virence health, the former GE healthcare unit it acquired earlier this year, with Athenahealth.

About Veritas Capital

Founded in 1992, Veritas Capital Fund Management, L.L.C. is a New York based private equity firm focused on middle market leveraged recapitalizations, buyouts, and growth capital investments. It works across a variety of different industries, encompassing areas like education, government services, healthcare, technology, and infrastructure companies in its portfolio. However, it is best known for strategic investments made into the national security, technology, and government services industries. In its two decades of operation, the fund has come to manage $8.8bn in assets and has completed more than 80 acquisitions. Their strategic approach includes steps like investing in business development and pursuing accretive acquisitions, with the ultimate purpose of creating intrinsic value over the lifetime of their investment. This approach is mirrored in their move to acquire Athenahealth, which they hope to combine with another recent purchase, Virence Health. Virence Health Technologies, the former GE healthcare services unit, specializes in offering healthcare providers software that manages their financial, clinical, and human capital workflows.

About Elliot Management

Founded in 1977, Elliot Management Corporation is a hedge fund sponsor that invests in public equity, fixed income, and alternative investment markets. It manages $35bn in assets across its 4 locations: New York, London, Hong Kong, and Tokyo. While it incorporates many factors into its investment strategy, it focuses primarily on elements like opportunistic trading, value creation, and effective liquidity management to generate consistent returns for its investors. Since its inception, Elliot has built not only a profitable portfolio but an infamous reputation. Known as the largest activist fund in the world, Elliot has routinely involved itself in the decision-making and strategy of its corporate investments, often to the dismay of the boards and C-suites that represent these companies. It has also been routinely referred to by critics as a “vulture fund”, which can be seen in recent acquisitions such as that of failing AC Milan earlier this year. In a break from traditional hedge funds, Elliot Management recently created its own subsidiary private equity firm, Evergreen Coast Capital, to conduct its leveraged buyout transactions. The decision to buy out Athenahealth with the help of Veritas marks the largest transaction Evergreen has handled to date.

About AthenaHealth

While Athenahealth Inc. may be known as one of the largest healthcare software providers today, this has not always been the case. In 1997 Athenahealth began in rather humble fashion as a women’s health and birthing center in San Diego, California. However, upon witnessing the advent of cloud computing and the potential it held for healthcare services, co-founders Jonathan Bush and Todd Park transitioned Athenahealth into a medical data company in 1998. In 2007 Athenahealth completing its initial public offering at a price of $18 per share, effectively valuing the company at $568.8m.

Athenahealth Inc. provides cloud-based services and point of care mobile applications for healthcare systems and their providers in the United States. Through its proprietary cloud-based software athenaNet, it provides network based medical records, revenue cycles, patient engagement, care coordination, and population health services. It offers a range of services under its athenaOne product suite, which includes its practice management solution (athenaCollector), electronic health record system (athenaClinical), and care coordination solution (athenaCommunicator). The company also allows for different versions of these products depending on the needs of its clients; for instance, larger customers may choose to invest in athenaOne for Hospitals and Health Systems because it allows for better integration across expansive systems than the traditional athenaOne product suite. In addition to these main service offerings, Athenahealth also provides point of care services through a mobile POC company they acquired in 2013: Epocrates. Their POC services cover a variety of applications, including tools like medical calculators, clinical guidelines, and a financial analytics platform. As of the end of FY2016, the company connected 80,000 providers with nearly 86 million patients.

In recent years, Athenahealth has been experiencing healthy growth, with revenues increasing by 13% in FY2017, from $1,082.9m to $1,220.3m. Also, during FY2017, gross margin increased to 52.6% from 50.7% and EBITDA increased to $218m from $169m. The 3rd quarter of 2018 brought in $79m in EBITDA, a nearly 43.19% year-on-year increase from FY2017. The results reflected in FY2017 and in reported 2018 financials are merely an extension of previous years of positive financial growth. However, positive financial growth has recently been overshadowed by investor and management challenges. Despite the double-digit revenue growth of 2017, Elliot Management cited missed revenue expectations when proposing their lower-than-expected offer of $160 per share. In an effort to fight the takeover bid, Athenahealth marketed itself to other potential buyers, only to find itself underwhelmed by its lackluster options. Since the announcement of the removal of former CEO Jonathan Bush in June, Athenahealth’s stock has fallen from its June high of $160.75 to a pre-deal value of $120.35. While part of this decline can be attributed to widespread October market decline, an important factor to consider is the effect these internal struggles continue to have on investor confidence.

Industry Overview

The global healthcare information systems market size was estimated at $85.6bn in 2016 and it is expected to register a CAGR of 11% from 2018 to 2023, thanks to the increase in adoption of advanced technologies in healthcare facilities and a growing incidence of Chronic Diseases. Governments are also expected to continue to play a role in non-regulatory functions, such as funding research to identify successful practices and adopting consensus standards within their own health IT to signal government support. In response to the positive trend, venture capital and private equity investors alone deployed more than $60bn into healthcare IT industry from 2012 to 2017. This picture is contrasting to that of ten years ago, when, as analysts say, only a few private-equity houses had dedicated health-care teams while today everyone does.

The key vendors of healthcare information system across the world are McKesson Corporation, Philips Healthcare, Cerner Corporation, Merge healthcare Inc., and GE Healthcare. Since these players are focused on innovation, they are expected to take up partnerships and mergers and acquisitions to share their proprietary access to information technology and to better ride the wave of the technological shift in the Healthcare industry.

By dividing the industry by application, hospital applications account for almost 50% of the total market size, while Pharmacy and Revenue Cycle Management applications represent the other 40%. With regards to the division of the market by end user, as showed in the graph below, Hospitals held the largest revenue share, due to the growing penetration of IT in the field, especially regarding the data management systems.

Even though optimistic forecasts have been produced, it is also necessary to take into consideration the industry’s risk. The high costs of investments required to purchase the systems, to install and maintain them, and the cost of training labor to use them are discouraging many end users from the adoption of the new-age healthcare information systems. Therefore, a potential drop in demand is acting as a major restraint for the global market. Another factor which can hamper the growth of the overall market in the coming years is cyber security. Lastly, issues related to integration and interoperability are also likely to hold the market back to a noticeable extent.

Deal Structure

The all-cash $5.7bn deal values the health IT company at $135 per share, representing a premium of 12.2 percent to the stock’s closing price on November 9, 2018. The acquisition has been made by Veritas, which will own a majority stake, and Evergreen Coast Capital, a subsidiary of Elliott Management, which currently owns a 9% stake.

The price tag is based on Athenahealth’s fully diluted share count and it implies a multiple of 4.67x on the 2017 revenue ($1.22 bn).

The transaction is expected to close in the first quarter of 2019: it has been unanimously approved by the Athenahealth Board of Directors but is still subject to the approval of the holders of the majority of Athenahealth’s outstanding shares and the satisfaction of customary closing conditions and regulatory approvals.

Upon completion of the acquisition, Veritas and Evergreen plan to combine the US-based company with Virence Health, the former care group of GE Healthcare that was bought by Veritas earlier this year. The combined business is expected to operate under the Athenahealth brand and to be a leading, privately-held healthcare information technology company with an extensive national provider network of customers and world-class products and solutions to help them thrive in an increasingly complex environment. Following the merger Evergreen Coast Capital will retain a minority investment stake in the combined company.

Deal Rationale

The year 2018 has proved to be a tumultuous year for Athenahealth. On the 6th of June 2018, Mr. Jonathan Bush stepped down as the network-based health records company’s chief executive as well as from the board amid pressure from outside investors, most notably Elliot Management. Athenahealth had gone public in 2007 under the guidance of its founder, Mr. Bush, with its stock growing by more than a thousand percent when it reached its all-time high of $206.7 per share in February of 2014. In the last four years, however, the company has experienced fluctuating decreases in its market capitalization from its high of about $7.3bn in in February 2014 to $5.4bn on the day the deal was announced. Mr. Bush has recently been struggling with allegations regarding his personal life, sanctioning a reaction from shareholders with Elliot Management, a hedge funds holding a 9 percent stake in Athenahealth, claiming the company had been mismanaged and had failed to grow as expected.

Elliot Management had been pushing for Athenahealth to either sell or go private. Following the acquisition, Athenahealth will merge with Virence Health, a previous acquisition of Veritas, operating as a private company under the Athenahealth brand and the leadership of the current Virence CEO Bob Segert. Athenahealth hopes to increase flexibility through taking the company private under Veritas’s ownership as the two companies offer differentiated solutions to their respective customer bases while sharing similar cultures of commitment to clients and innovation. After merging, the new combined company will be able to consolidate some business functions while gaining access to new cost cutting measures, a resort already taken by Athenahealth through a substantial workforce cut of about 9% generating over $100m in savings starting from August 2017.

The healthcare software market is a growing one with an aging population, especially in the developed world, and worsening dietary patterns including more fast food. This space is forecasted a CAGR of 7.4 percent in the next five years. Health tech companies such as Athenahealth are in a prime position to take advantage of this market, especially following reform during the Obama administration requiring doctors to digitalize their paper filing systems. However, in the past year, Athenahealth has gone through major restructuring effort including cutting staff and changing its CEO while Veritas has taken an aggressive acquisition strategy within the health IT space acquiring Cotiviti, a provider of payment accuracy and analytics-driven solutions, in the summer of 2018. Under the management of Veritas, Athenahealth will be in a better position to reap the benefits of this growing market and match the growth expectation of stakeholders such as Elliot Management.

Market reaction

Investors have reacted positively to the acquisition: on the day of the announcement, stock prices for Athenahealth grew by 9.5 percent to $131.82 and remained stable around the same price for the following days. The sale will help to stabilize Athenahealth’s managerial struggles and help the company increase their profit margins, supporting the investors’ confidence in the acquisition.

Financial Advisors

Lazard and Centerview Partners are serving as financial advisors to Athenahealth. Deutsche Bank and RBC Capital Markets are acting as financial advisors to Evergreen Coast Capital.


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