Cognizant Executive Leadership Says the Decision to Acquire TriZetto is Driven by Revenue Synergies
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.
“We acquired TriZetto for revenue synergies, not cost synergies,” Cognizant President Gordon Coburn tells CNBC-TV18. “U.S. healthcare clients are desperate to cut costs and therefore, there cannot be a better time than today to buy TriZetto.” Excerpts from the interview:
“Revenues from TriZetto will add to incremental guidance, no matter how big or small. TriZetto’s margins are comparable to us; this is a topline play. We continue to conservatively manage our business and it also leaves us cash available to continue with our share repurchase program that we know is important to our investors.
TriZetto did a little over USD 700 million of revenue on a last 12 months basis. We would certainly expect growth in calendar 2015. We expect about USD 1.5 billion plus of revenue synergies.
When we looked at the value of TriZetto, we focused on what value it would bring to Cognizant. There could not be a better time than today to acquire TriZetto. U.S. healthcare clients are desperate to simultaneously reduce costs and invest in innovation. Fully integrated technology and services meet an immediate and real need of the healthcare market.
We believe the significant synergies resulting from this transaction will be good not just for Cognizant and our shareholders, but also for the U.S. healthcare system in making it more efficient. We believe we paid a fair price based on a very deep knowledge we have of the business. We have the largest practice of providing systems integration to TriZetto of any services player out there. We know this company well. We know the market well. We are very comfortable with the assumptions we made on valuations.
There are four buckets of revenue synergies. The first one is the systems integration work that we do today in terms of installing a new TriZetto platform. We think now that we are more closely aligned with TriZetto, we will have far greater opportunities to do that systems integration work.
The second is around business process services. TriZetto has been offering its clients some business process services around its platform, but didn't have the scale that some of the clients needed. Clients wanted to buy an integrated stack of platform plus infrastructure plus business process services, but they needed it at scale. We bring the scale; we have 25,000 people doing business process services in the company. Combined, TriZetto and Cognizant can now compete for much larger deals that include business process services.
The third one is that it will strengthen our hosting business because TriZetto also has a hosting business. The fourth and the most important one—also the one that will take a little bit of time—is about integrated deals. Last month we announced a deal with Health Net—the ninth largest insurer in the U.S.—to take over responsibility for their platform, infrastructure and business process services, and move to a model that variablizes the cost for them. We think there are opportunities to do this throughout the healthcare system in the U.S. with both very large as well as small payers.
We think these four things together create very real revenue synergy opportunities that can have tremendous positive impact on the U.S. healthcare system. We think Cognizant will be in a leadership position to provide these services due to our existing knowledge.”
Coburn tells Bloomberg TV, “We need material non-linear platforms and this acquisition gives us that position in healthcare. So we certainly think it is going to be good for growth and supportive of our existing margin base.” Excerpts from the interview:
“This is a natural marriage between the companies because of what’s happening in the market, how well we know each other, the strength and quality of the TriZetto platform combined with the strength and quality of our services capability in healthcare.
One thing that we are most excited about is the synergy opportunities. TriZetto is a very well-run company. They are already very efficient on the cost side. So we are focused on revenue synergies. We expect $1.5 billion over the next five years.
We think we have a combined offering that is exactly what clients want and what clients need in order to reduce the cost of healthcare delivery in the U.S., improve quality of care, and most importantly, make a positive difference in the lives of hundreds of millions of people.”
In an interview with ET Now, Karen McLoughlin, Chief Financial Officer, Cognizant, says, “The healthcare market is clearly undergoing very significant structural changes in the U.S.—increasing cost pressures, regulatory reforms, demographics of an aging population, and changing relationships between the payers and providers—and we believe that the TriZetto acquisition will give us the ability to help our healthcare clients build the winning business models of tomorrow as they deal with these issues.” Excerpts from the interview:
“What we have seen in recent times is that our healthcare clients truly need a fully integrated technology and services partner in order to be able to run more efficiently, while at the same time drive innovation and growth. The combination of TriZetto and Cognizant will allow us to help them on their journey.
This deal is really about the revenue synergies. We expect to create $1.5 billion of cumulative revenue synergies over the next five years. The acquisition is accretive on a non-GAAP operating margin basis and this is really about creating that long-term solution for our clients. We believe that this acquisition will allow us to more effectively grow both the Cognizant business and the TriZetto business, and drive those revenue synergies that will create long-term shareholder value as well as value for our clients.
We expect to see a significant continued demand for change in the healthcare industry in the U.S. It is a very large percentage of the GDP in the US. There is a significant wave of change and transformation in the healthcare industry and we believe that in order for us to be best positioned to serve our clients both with their ‘run better’ as well as ‘run different’ initiatives—what we call ‘dual mandate’—we really needed to have that platform and be able to deliver that end-to-end solutions for our clients.
This acquisition had absolutely nothing to do with the fact that we had cut down our guidance. In fact, if we didn’t believe that we were coming from a position of strength, we would not have afforded the acquisition. We believe that this is absolutely the right acquisition for us.
Even with the TriZetto acquisition, we have both the financial stability and the bandwidth within the organization to continue to focus on more investment at the same time.”