TriZetto buy to bolster Cognizant's health care business

Cognizant on Monday charged the otherwise sleepy mergers and acquisition (M&A) market in information technology (IT) services, announcing an agreement to buy US-based TriZetto for $2.7 billion, almost four times the acquired company's revenue  in 2013. 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.

"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 in a report issued after the acquisition.

TriZetto reported revenue of $676 million in 2013 with an employee base of 3,700. The company's annual revenue per employee at $182,703 is much higher than Cognizant's $51,800. Despite its higher cost structure, TriZetto's operating profit margin at 18.5 per cent is almost close to that of Cognizant, which will not have to divert energy to strengthening profitability.

MAKING THE RIGHT MOVES

• TriZetto's margin profile is relatively better; higher mix of recurring revenues makes it attractive
   
• Its annual revenue per employee is much higher than that of Cognizant's
   
• Deal would give Cognizant greater exposure to payer side of health care business

Cognizant is a rare IT services company that has put in energy into dominating the health care sector. It is perhaps the only offshore-centric IT services company to offer a breadth of health care services that account for almost 26 per cent of its revenue. Cognizant's last two quarters were not encouraging in the US because of the indecisiveness of clients on how to react to the Affordable Care Act, otherwise known as Obamacare.

The acquisition of TriZetto -which develops and licenses IT platforms and services for health care providers and payers, competing with Allscripts, DST Systems and McKesson - will strengthen Cognizant's application services capability, making it more compelling for clients. Headquartered in Denver, Colorado, TriZetto was founded in 1997. In 2008, the company was taken private by Apax Partners for around $1.4 billion. The company serves over 200 clients, including 16 of the top 20 US health plans and four of the top five pharmacy benefit management firms.

"Unique, high-quality assets are rare in this industry," said Karen McLoughlin, chief financial officer, Cognizant. "We believe the price we have agreed to pay is a fair one, in line with the valuation of this type and quality of asset. In addition to TriZetto's attractive current business with approximately $711 million in LTM (last twelve months) revenue at an attractive profit margin, we believe we can drive incremental revenue above and beyond what Cognizant and TriZetto would have done on their own of approximately $1.5 billion cumulatively over the next five years," she added. 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."

According to research by the Everest Group, the market opportunities for IT services players in the health care and life sciences segment in the US stood at $30 billion in 2013. This is expected to climb to $43 billion by 2016. None of the Indian IT services companies, except Cognizant which is headquartered in the US, has been able to make a big dent in the health care segment in North America.