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Allscripts' Eclipsys deal: the financial details


By Joseph Conn
Posted: June 14, 2010 - 12:15 pm ET
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Part one of a two-part series:

Allscripts-Misys Healthcare Solutions, Chicago, a developer of electronic health records systems for ambulatory-care physicians, will borrow most of the $577 million or more needed to extricate itself from the majority control of British IT developer Misys and then swap $1.3 billion in stock to buy all of Atlanta-based hospital and physician electronic health-record system developer Eclipsys.

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For Allscripts, “It's a great deal,” said Vinson Hudson, founder of Jewson Enterprises, Austin, Texas, a healthcare IT consultancy specializing in systems for physician offices. “I think for Allscripts, they want to be the largest and they want to remove McKesson as being the largest, in terms of revenue from the physician end.”

Several other industry observers, however, see the deal in less certain terms.

One of them is physician William Bria, chairman of the Association of Medical Directors of Information Systems, a professional association of physicians in applied medical informatics. With the advent of the federal government's multibillion-dollar health IT subsidy program, the pressure has increased on hospital system vendors to have an integrated product offering for use in the hospital inpatient environment and in ambulatory care, Bria said.

Many healthcare IT companies have built their two-way systems as Allscripts is attempting to do, through acquisition, he noted, but that's no guarantee this latest attempt will succeed.

“The devil in the details is whether they will spend the time, money and creativity to craft the full integration of their products,” Bria said.

Todd Cozzens, CEO and vice chairman of Picis, a Wakefield, Mass.-based developer of hospital IT systems for emergency rooms, intensive-care units and surgical facilities, agrees.

“If you were new to this industry, you'd say it probably makes sense in that the more-dominant players have already done this,” Cozzens said. “On the other hand, this is healthcare, and it's complex. Execution is everything.”

He added: “We don't see a big impact on our business, because if anything, they'll be tied up with their internal issues and selling to their internal customers.”

One such internal customer is Alan Snell, chief medical informatics officer for the Indianapolis-based St. Vincent Health system. Snell sees great potential benefit from the merger for his organization, which uses the Eclipsys Sunrise Clinical Manager software platform for its inpatient clinical IT system and Allscripts' top-of-the-line Enterprise EHR for its 250-physician provider network.

“They really don't talk to each other right now,” Snell said, referring to the lack of interoperability between the two EHR systems. “We've looked at ways of being able to present data between the two, but hopefully” the merger will accelerate some of that activity, he said.

Snell said the hospital had been looking at Eclipsys' software integration platform, Helios—launched earlier this year—as a possible solution. “That would be a nice way to do it,” he said. Still, he acknowledged, the inpatient-ambulatory interoperability problem won't be resolved overnight.

Initially, Wall Street gave the June 9 announcement a chilly reception. The price of Allscripts shares dropped that day to $16.64, down $1.78, or 9.7%, from the previous close. The following day, though, the stock closed at $17.21, up $0.57, or roughly 3%.

Allscripts joined with Misys in October 2008 when Misys unit Misys Healthcare Systems, Raleigh, N.C., paid $330 million for a controlling interest in Allscripts. Allscripts, which had about 146.2 million shares of common stock outstanding at the time last week's deal was announced, will buy back from parent company Misys about 24.4 million shares at $18.82 a share ($460 million in total) and pay Misys a premium of $117.4 million for majority control, for a total cost of $557.4 million, according to a company statement last week.

Allscripts will also help Misys market an additional 36 million of its shares of Allscripts stock.

Finally, Allscripts will give Misys an option to require the newly formed Allscripts to buy back 5.3 million more of its shares at $18.82 a share for $100 million, leaving Misys with either an 8% or a 10% interest in the newly merged Allscripts, according to company statements.

So where is Allscripts getting the money for the deal?

“Some of it will be cash on hand and a chunk of it will be debt,” Allscripts CEO Glen Tullman said. “About $490 million will be debt, but it could be $100 million higher than that” depending on whether Misys exercises its option.

With the combined cash flow of the two companies, “We can pay that debt back in just under 2 years,” Tullman said. “Allscripts had $46 million in free cash flow in last quarter.”

Allscripts has secured a total of $720 million in loan commitments for the transaction from JPMorgan Chase & Co., Barclays Capital and UBS, according to its public statement.

Meanwhile, on buying Eclipsys in an all-stock swap, Allscripts will trade Eclipsys shareholders 1.2 shares of Allscripts stock for each share of Eclipsys stock, a 19% premium based on the closing prices of their respective stock on June 8, a deal valued at $1.3 billion, according to a company statement.

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