Cognizant to buy US-based TriZetto for $2.7 billion

Deal to bolster firm's position in healthcare IT

In what could strengthen its leadership in the healthcare technology space, Nasdaq-listed information technology (IT) services company Cognizant has entered into a definitive agreement to acquire US-based TriZetto in an all-cash deal valued at $2.7 billion (around Rs 16,510 crore). The deal, set to be the most expensive acquisition by an offshore-centric Indian IT services company, marks a significant shift in Cognizant's 'string of pearls' strategy, under which it has made several tuck-in acquisitions of small and mid-sized companies.

The acquisition was to be funded through a combination of cash and debt and the company had secured $1 billion of committed financing support for it, Cognizant said in a statement on Monday.

Denver, Colorado-headquartered TriZetto, which earlier engaged with Cognizant for jointly serving clients, is a significant player in the healthcare segment in the US. It reported $676 million in revenues in 2013 and serves over 200 clients, including 16 of the top 20 US health plans and four of the top five pharmacy benefit management firms.

Following the acquisition, Cognizant's grip on the segment will increase further, leaving behind peers like Wipro, Infosys and Tata Consultancy Services. At present, health care accounts for around 26 per cent of Cognizant's revenue. This is estimated to go up to 30 per cent on integration with TriZetto.

"Cognizant and TriZetto have had a long-term relationship, having jointly served a number of healthcare clients to date," said Cognizant President Gordon Coburn. "This acquisition is a natural fit for us. It represents a great opportunity to integrate services across our three horizons - traditional IT services; high-growth businesses like management consulting, business process services and IT infrastructure services; and emerging delivery models - and provide even greater value to our clients."

At present, TriZetto is owned by Funds advised by Apax Partners, together with minority investors BlueCross BlueShield of Tennessee and Cambia Health Solutions. As part of the deal, Cognizant will bring on board the 3,700 employees of TriZetto.

The acquisition was likely to be immediately accretive to Cognizant's earnings per share, excluding one-time transaction costs and adjustments, chief financial officer Karen McLoughlin said in a statement.

The earnings benefit would increase over time, as the company saw significant revenue synergy potential from the combination of these businesses, McLoughlin said.

According to experts, while the valuation of TriZetto looks "quite inflated", such a valuation is not uncommon in the products and platform space for a company targeting a niche segment. "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 US is normal," said Sanchit Vir Gogia, chief analyst at Greyhound Research. "I think it is a very good acquisition for Cognizant."

Cognizant said it expected this acquisition to "significantly accelerate" its market position in the healthcare space, as TriZetto brought a significant and complementary new market opportunities, expertise and IP. Among other things, TriZetto brings to Cognizant intellectual properties like multiple industry-leading software platforms used by payers and providers, besides enhanced competitiveness in integrated engagement opportunities.

The acquired company is also expected to bring Cognizant approximately $1.5 billion of cumulative revenue synergies over the next five years, and an attractive non-linear software revenue.

"With more than $3 billion in combined healthcare revenue, Cognizant and TriZetto will serve nearly 245,000 health care providers, as well as approximately 350 payers with approximately 180 million covered lives in the US," the Cognizant release said. "The acquisition positions Cognizant to address the rapidly changing healthcare marketplace - currently 17 per cent of the US GDP - with next-generation solutions that increase efficiency, reduce costs and improve healthcare outcomes."

The acquisition is expected to close in the fourth quarter of 2014 and is subject to customary adjustments on the total payout.

"Health care is undergoing structural shifts due to reform, cost pressure and shifting responsibilities between payers and providers. This creates a significant growth opportunity, which TriZetto will help us capture," said Cognizant Chief Executive Francisco D'Souza. "We are excited that the integrated portfolio of capabilities across technology and operations will uniquely position us to help clients drive higher levels of operational efficiency, while re-imagining care for the future."

SPREADING WINGS
Cognizant's key acquisitions since 2009

2009: Active Intelligence, US (Oracle retail solutions)

• Pepperweed Advisors, US (Consulting; IT infra services)
• UBS captive in India (BPO/KPO)

2010: PIPC, UK (Program management)

• Galileo Performance, France (Test consulting)

2011: CoreLogic captive in India (Mortgage processing KPO)

• Zaffera, US (SAP Consulting for retail)

2012: MediCall, US (Medical management)

2013: Six companies of CI Group, Germany (SAP enterprise application, high-end testing)

2014: Itaas, US (Digital video solutions)

• TriZetto, US (Healthcare IT)

In brackets: Focus area

THE TRIZETTO BUY

• Value: $2.7 bn to be paid in cash through funds in hand and debt
   
• Debt: $1 bn tied up to fund acquisition
   
• TriZetto revenue: $676 million in 2013
   
• Staff: Cognizant to add 3,700 employees through this buyout
   
• Stocks: Acquisition to be EPS-accretive immediately
   
• Closure: Acquisition expected to close in the fourth quarter of 2014