By James Crabtree. This article originally appeared on the Financial Times website, FT.com on September 15th, 2014
Cognizant Technology Solutions struck its largest deal to date on Monday when it paid $2.7bn in cash to buy US healthcare IT services provider TriZetto from private equity group Apax, in a bid to boost its healthcare business.
The companies said the combined company will have more than $3bn in healthcare revenue while serving 245,000 healthcare providers and payers who cover about 180m people in the US.
The deal values TriZetto at nearly four times its revenues of around $700m last year. Cognizant said it expected revenue synergies of $1.5bn over the next five years from the deal, but said it had no plans to cut costs at either organisation, with all revenue benefits coming from new business opportunities.
Shares in Cognizant rose 3 per cent on news of the deal, but later fell back to trade broadly flat amid analyst concerns over the acquisition’s price.
“It doesn’t seem to be cheap at all,” says one IT analyst at a global financial institution in Mumbai. “It’s 3.8 times sales for an asset which isn’t growing nearly as fast as Cognizant . . . I think they may have overpaid a bit.”
Although Cognizant has a lengthy background providing IT to US healthcare groups, analysts said it could face challenges integrating TriZetto’s predominantly US-based workforce. Only around 1200 of TriZetto’s 3700 staff are based in India.
Francisco D’Souza, Cognizant chief executive rejected criticism of the acquisition. “We think we paid a fair price,” he said, adding, “Companies like this seldom come at a discount … we paid what we think we needed to pay to get the deal done.”
Mr D’Souza said the deal would allow Cognizant to extend outsourcing further into America’s healthcare sector, at a time when regulatory changes, including the implementation of the Affordable Care Act, commonly known as Obamacare, were forcing providers to cut costs and change business models.
“The healthcare industry in the US is going through a period of significant change,” he said. “Part of this is cost pressure, but the Affordable Care Act also puts tremendous emphasis on consumerism in healthcare, of putting more information in the hands of patients . . . so this another place where technologies can play a substantial role.”
India-based IT services groups have long attempted to increase revenues in healthcare industries, where offshore outsourcing is less common than in sectors such as financial services and telecoms.
Cognizant, which is headquartered in New Jersey but conducts most of its software operations from India, said the deal would consolidate its position as one of the world’s leading providers of healthcare IT, a sector where the company made roughly a quarter of its $8.9bn in revenues last year.
Privately-held TriZetto develops administrative software that connects healthcare bodies and insurance companies, and was sold by Apax Partners, a London-based private equity group, which acquired the group in 2008.
Cognizant said it has arranged $1bn in financing to back the acquisition.
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