Industry Analysts and Observers Cheer Cognizant’s Decision to Acquire TriZetto
On September 15, 2014, Cognizant announced a definitive agreement to acquire TriZetto Corporation for $2.7 billion in cash, subject to customary adjustments. Based in Englewood, CO, privately-held TriZetto is a leading provider of healthcare IT software and solutions.
With more than $3 billion in combined healthcare revenue, Cognizant and TriZetto will serve nearly 245,000 healthcare providers, as well as approximately 350 payers with approximately 180 million covered lives in the U.S. The acquisition will create a fully-integrated healthcare technology and operations leader, positioning Cognizant to address the rapidly-changing healthcare marketplace—currently 17 percent of U.S. GDP—with next-generation solutions that increase efficiency, reduce costs and improve healthcare outcomes.
Jason Kupferberg, an analyst at Jefferies Group LLC, said, “While this acquisition represents a sharp departure from CTSH’s historical M&A strategy, our initial reaction is that TriZetto will significantly enhance CTSH’s competitive position in the health care vertical.”
Payer consultant Pat Kennedy, President of PJ Consulting, said that Cognizant will have full access to TriZetto’s clients as a result of the acquisition. “That means it can integrate with TriZetto’s information systems—including the flagship FACETS enterprise core administration platform—and have access to TriZetto payer clients…TriZetto also brings Cognizant access to more than 150,000 providers who use TriZetto for clearinghouse services, including a great relationship with Epic sites. The combined company also brings many opportunities for cost savings and revenue growth. So to Cognizant, TriZetto is worth the money being spent,” he observed.
Terming the deal as a “smart one”, Ray Wang, Principal Analyst and Founder at Constellation Research, said the acquisition will enable Cognizant to differentiate itself in the U.S. healthcare market. “The healthcare space is undergoing a massive tech overhaul as it moves from mainframes, charge masters, and legacy tech to a push for electronic medical records because of ObamaCare and other requirements. As healthcare goes through digital transformation amidst an aging U.S. population, it helps create a pathway to short and mid-term growth for Cognizant,” said Wang.
Calling Cognizant “The New ‘Big Blue’ of Healthcare IT”, Everest Group’s Abhishek Singh, Practice Director, and Nitish Mittal, Senior Analyst, wrote: “The deal ties in favorably with Cognizant’s dominant position in the healthcare IT marketplace. The acquisition is a landmark deal within the…IT service provider community, given the size, scale, intent, and implications to the status quo, but what makes it unique is its focus on industry solutions versus other services-centric acquisitions.”
They added, “Cognizant aims to leverage its dominant position in the market—a healthcare IT portfolio in excess of US$2 billion—to provide an integrated portfolio across services and platforms…This acquisition could be one of the steps allowing Cognizant to cross-pollinate and build an integrated (applications/infrastructure/business process services) services play in an industry in which it has primarily relied on its application services strengths.”
“The ongoing transformation in the U.S. healthcare system is shaping service provider’s strategies as they look to capture the incremental opportunity that is up for grabs,” they wrote. “Cognizant will aim to drive increased stickiness with healthcare buyers to drive retention in an increasingly complex vendor landscape. It is aimed at garnering a large share of the growth pie, when it comes to the payer and the provider ITO market. This acquisition is an unmatched clear indication that service providers must evolve from a services-only play to a platform-based solutions play, to stay relevant in a market that has an immense potential to grow.”
According to them, Cognizant is ideally placed in healthcare with few like-sized competitors, allowing it to consolidate. “Two things that are definitely salient here—one, Cognizant is going all out to bet big on healthcare; and two, this acquisition has the potential of taking it to a different league altogether,” they observed. “There are already murmurs in the healthcare IT industry equating Cognizant to a new ‘IBM’, when it comes to its negotiating power at the table. This is another step in ensuring it stays ahead of peers as the competitive intensity in the market increases. The deal definitely has characteristics of a long-term strategic bet than a tactical maneuver.”
“While the valuation looks high, analysts and experts said TriZetto’s services to niche segments and its superior productivity delivered more to Cognizant than was immediately evident,” wrote Business Standard. “Cognizant is a rare IT services company that has put in energy into dominating the healthcare sector.”
“While over 3.8 times of revenue is a steep price to pay, we are encouraged by higher exposure to better margin-recurring software revenue and to the vertical strength of the company,” said equity analyst firm Morgan Stanley. According to Morgan Stanley, the acquisition of TriZetto by Cognizant would provide it with greater exposure to software, which ultimately should translate into better growth and a better margin business with a higher mix of recurring revenue. “The deal also provides greater exposure to the payer side of the health care business and likely gives them a seat at the table for larger deals such as the $2.7 billion seven-year HealthNet deal announced at the last earnings call,” the firm wrote.
“If Cognizant was paying such a high valuation for a pure-play services company, it would have been worrisome. But a four to five times valuation for an intellectual property (IP)-related company in the U.S. is normal. I think it is a very good acquisition for Cognizant,” said Sanchit Vir Gogia, Chief Analyst at Greyhound Research.
“This is a push towards leveraging non-linearity and Cognizant has moved the goalposts in the pharma and healthcare space,” averred Amit Singh, Executive Director (Technology & Outsourcing), Avendus Capital.
Phil Fersht, CEO, HfS Research, said, “This is the most significant and sizable acquisition yet by [a] major service provider and paves the way for how we expect future services growth to take shape. Cognizant wants to provide complete BPaaS (business process-as-a-service) for healthcare clients.”
Raja Lahiri, a Partner at Grant Thornton India Llp, said, “The U.S. healthcare market has been a target for all the major IT services exporters, which has been triggered majorly by Obamacare and the huge opportunity for digitizing health records. This acquisition will help Cognizant gain a sizeable foothold in the U.S. healthcare market, where it already holds a dominant position compared to its peers.”
Sanjeev Hota, analyst with brokerage house Sharekhan, opined, “[The] purchase would make Cognizant the undisputed leader in health-care IT…It will be a challenge for other IT companies to penetrate the US health-care market.”
“It is a strong strategic move by Cognizant, enabling the company to expand its reach as it has identified a partner which has extensive penetration in the healthcare provider ecosystem,” said Nishchal Khorana of consulting firm Frost & Sullivan.
“The TriZetto deal vaults Cognizant to the second slot in terms of overall revenues…and gives it a pipeline into what is becoming an increasingly consolidated provider system marketplace in the U.S.,” observed Joseph Walent, analyst at Technology Business Research, U.S.
“We believe that the acquisition will provide a significant boost to Cognizant’s top line going forward,” wrote Zacks Equity Research. “It will help the company to cash in on the future prospects of the health care industry, which currently accounts for near about 17% of U.S. gross domestic product (GDP). Further, we believe that TriZetto will be easier to integrate since both the companies have many healthcare clients in common.”
Anil Doradla, analyst at William Blair, said, “With the acquisition, we believe [Cognizant] is positioning itself to benefit from the multiyear secular tailwinds driven by an aging U.S. population, the Affordable Care Act, shifting responsibilities of payers and providers, and employers’ desire to shift to defined contribution. We are incrementally positive largely due to the non-linear nature of TriZetto’s business model of roughly 60% of revenues being recurring and software in nature. Bottom line, in our opinion, as incremental revenue synergies hit the top line, operating margin leverage should provide a tailwind to potential earnings growth over the next several quarters.”
Harish HV, partner at consulting firm Grant Thornton, said Cognizant’s aggression would prod its rivals to do an encore.