The U.S. healthcare industry's oldest information systems company--its growth stalled and its products under competitive pressure from the Internet generation--agreed last week to become part of an international technology company 60 times its size.
For Shared Medical Systems, which pioneered the healthcare software business more than 30 years ago, the decision to be acquired by Siemens Medical Engineering Group for $2.1 billion provides prodigious capitalization and a vision of soup-to-nuts integration of clinical information.
Based in Erlangen, Germany, Siemens Medical is a unit of Siemens AG, which had sales of $72 billion in fiscal 1999 ended Sept. 30.
The deal, which is expected to close by the end of June, will give Malvern, Pa.-based SMS the strength to respond to a "sea change" in the healthcare industry without disrupting the affairs of its client base, said Marvin Cadwell, president and chief executive officer. The company has 2,200 domestic customers, mostly hospitals, that operate its information systems or contract for information services.
"SMS has always prided itself in finding its way through the turbulence in the industry," Cadwell said, adding that he has "never seen a period of time where the changes have been so great. In that change there's bound to be an element of risk, and we want to be in a position to handle that risk."
Critics of SMS' traditional cautiousness, including some former executives, say the company's reluctance to take risks in the past is partly behind the series of events leading up to the acquisition decision.
Siemens will pay about $2.1 billion in cash for all the shares of SMS. At $73 per share, the bid price was 76% more than the $41.50 closing price of SMS stock the previous trading day. And it bested a $67-per-share, $2 billion hostile offer made in March by rival Eclipsys Corp., whose founder and CEO, Harvey Wilson, was a co-founder of SMS.
Until the recent acquisition interest, the market value of SMS had hovered around $1 billion, about the same as it was four years ago. And financial figures reported last week revealed continued stagnation. In the first quarter of 2000, the company reported a 16% decline in revenue to $241 million. Net income plummeted 85% to $2.7 million, compared with $18.3 million a year ago.
Cadwell said earnings were hurt by "an industrywide weakness in new software sales and a slower-than-anticipated return in the demand for large-system implementations following Y2K."
But some former SMS executives said the slowdown was evidence that the venerable company isn't selling what providers want.
"In my view, they've lost contact with the marketplace," said Scott Holmes, one of the first hires when current Chairman James Macaleer and Wilson started SMS in 1969.
Holmes, now a venture capitalist and consultant to new information technology companies, said he watched SMS become more conservative in its response to new wrinkles in technology and healthcare business priorities over the years.
After holding a variety of management positions during nearly three decades, he left SMS in 1997.
"There was a period when we were moving mountains, but it didn't last," said Holmes of his SMS days. "They didn't dare to be great."
SMS was slow getting into the emerging market for information systems in clinical areas, content instead to sell upgrades and gain recurring revenue from existing customers as a result of "a stranglehold on people's business offices," said Bruce Sherr, another former SMS executive.
Unlike other software companies that went out and acquired new lines of information systems to fill a market need, SMS generally developed its advances internally. "They have a not-invented-here syndrome," said Sherr, explaining the company's aversion to adopting other firms' products.
That became more of a problem as the pace of business change accelerated in healthcare, said Sherr, now vice president of sales and marketing with HBSI, a Bellevue, Wash.-based information systems company specializing in decision support. "Speed to market has not been SMS' strength," he said.
But in a healthcare business climate of tightening financial constraints and little tolerance for rude surprises, the attention SMS pays to its provider customers helps them get the most out of their investments and makes up for some of the waiting for new software products, said Richard Bagby, chief information officer of Pinnacle Health System in Harrisburg, Pa.
"We're very happy with SMS," said Bagby, whose organization contracts with SMS for all information systems and services through an outsourcing arrangement. More than 60 SMS employees are on the information systems staff of the four-hospital system.
Even Holmes acknowledged the SMS culture of client satisfaction. "They were more concerned about customers than any other company," he said. "That's their legacy, that's what they did better than anyone else."
As a national showcase account of SMS, Pinnacle has tested some of the newest software in development, including a contract management system and a provision for doctors to gain access to patient test results from anywhere, using a secure Internet-style network.
Bagby said he would like to see the company move forward faster in developing clinical applications, but he's satisfied with a slow-but-steady approach. "I'd rather be a little farther back from the cutting edge than be way ahead of the cutting edge--at the bleeding edge."
Cadwell said the combination with Siemens will enable both companies to accelerate what had been separate efforts to develop a "more available and effective repository of healthcare information."
Siemens Medical Engineering is a leading maker of imaging equipment and other medical devices that diagnose or monitor patients. The firm's products collect volumes of information, but Siemens has no product to aggregate and organize it all, Cadwell said. SMS, meanwhile, is developing information systems to collect and manage clinical information but needs to add diagnostic information to support the clinical process comprehensively, he said.
In the meantime, Siemens has not broached the extent to which it will govern SMS' ongoing operations, Cadwell said. SMS headquarters will remain in Malvern and become the worldwide headquarters for Siemens information technology activities, said Erich Reinhardt, president of the medical engineering group.
Reinhardt also said the company plans to retain SMS people in key positions because of the value they provide in an information systems operation.
"They do not appear to have a desire to make hasty decisions," Cadwell added.