HBO & Co.'s acquisition of First Data Corp.'s health systems division would give the Atlanta-based software services vendor a client base that surpasses industry leader Shared Medical Systems.
With the addition of First Data's healthcare base of more than 500 cus-tomers, HBO & Co. boosts its customer base to about 2,100, triple what it was a year ago at the outset of an acquisition binge.
Malvern, Pa.-based SMS counts more than 1,500 customers. Its 1994 revenues of $551 million would still place it ahead of the combination of $327 million in HBO & Co. revenues and the $121 million reported by the First Data unit.
A definitive purchase agreement reached last week is the biggest deal yet in a methodical series of moves intended to expand HBO & Co.'s market share, preserve capital for product development and expand its software lineup to increase market opportunities. The deal is expected to close in early June.
The decision to use a stock deal in the purchase of the First Data healthcare business keeps HBO & Co. from having to give up cash or increase its debt load, allowing it to put more resources into research and development and working capital, said J. Steve Rushing, a partner with the Atlanta office of Andersen Consulting.
And the company also gains valuable technology expertise from a highly skilled First Data work force in Charlotte, N.C., that's been working on much the same clinical and integrative software agenda, Rushing said.
First Data's parent company will re- ceive about 4 million shares of HBO & Co. stock, making it the largest shareholder with about 12% of shares outstanding, said spokeswoman Monika Brown. At the closing price of $48.75 on May 17, the day after the deal was announced, the shares would be worth $195 million.
That's more than four times what the company paid for Ibax Healthcare Systems a year ago. With First Data, it's getting about the same number of clients but nearly twice the annual revenues that Ibax brought in.
Brown said the First Data purchase price took into account "a very good customer base" for prospective sales of HBO & Co.'s Pathways series of software applications, which are meant to build onto rather than replace existing healthcare computerization.
First Data also has a good recurring revenue base from annual renewals of software maintenance and remote-processing agreements, she said.
Smaller hospitals served by First Data's Saint series of healthcare software rely on the vendor for all support and computer services in one package, including the personnel to run the operations, said Rushing.
That provides a needed service to hospitals that can't afford their own computer "shop," and the business gets more profitable for the vendor as information systems mature and need less ongoing work.
"HBO's type of sales are very volatile and not necessarily as predictable as First Data Corp.," Rushing said. The acquisition of steady performers such as the Saint line shifts a predictable source of income to HBO & Co. and adds to available cash for product investment, he said.
As with Ibax customers (June 6, 1994, p. 38), the strategy behind the First Data acquisition is to provide incentives for existing customers to buy HBO & Co.'s new products. "It's a lot cheaper to keep a customer than find new ones, and HBO is a real pro at this," Rushing said.
Besides selling to more customers, the Atlanta software vendor is trying to acquire more things to sell.
Since the first of the year, it's acquired three smaller software vendors to fill product gaps: Care 2000, an Atlanta-based vendor of a case management product for multiple types of care sites; Advanced Laboratory Systems, a Eugene, Ore.-based laboratory system vendor; and Pegasus Medical, an Israeli software developer of a pen-based foundation for a computerized patient record.