Elliott Management is offering $160 in cash per share for athenahealth (NASDAQ: ATHN), a software company that’s reshaping the market for electronic health records. The deal may not get done, though, because athenahealth’s CEO, Jonathan Bush, has a long-term vision for athenahealth that may not jibe with Elliott Management’s plans. Could a friendly suitor emerge as a white knight that acquires athenahealth?
A market in big need of disruption
Most healthcare providers have replaced their endless rows of file cabinets with digital health records. But the health-records market is fragmented, so the digital records available to most patients are far from comprehensive.
Unfortunately, incomplete or inconsistent patient histories could be undermining providers’ treatment decisions, and causing unnecessary expenses because of duplicate testing. On a grander scale, the gaps in patient data are frustrating efforts by healthcare providers and payers to leverage artificial intelligence to crunch healthcare data in ways that can improve treatment for life-threatening conditions, such as diabetes, cancer, and heart disease.
Breaking down barriers around patient data so it can flow freely is only one of the ways that athenahealth is trying to improve the industry, though. Its solutions are also being used by providers to better communicate with patients, schedule visits, and to streamline billing — all areas where there’s a significant opportunity to improve upon existing business practices and processes.
Frustration sets in
Jonathan Bush has been advocating for a technology-driven healthcare revolution for years, and under his leadership, athenahealth has captured increasing amounts of the money spent by doctors and hospitals on managing patient care and records.
Yet, despite double-digit revenue growth at athenahealth, including a 13% increase in 2017, Elliott Management is unimpressed by the company’s performance.
In a letter it sent to athenahealth’s board of directors, Elliott Management acknowledged it’s had “constructive” conversations with management following its acquisition of about 9% of the company, but said that athenahealth’s lack of operational progress and its tepid stock-price performance have been “frustrating.”
In explaining why it wants to acquire athenahealth, it cited a litany of reasons, including:
- Executive turnover
- Operating ineffectiveness
- Product execution failures
- Strategy execution failures
- Forecasting and guidance failures
Elliott has a point about athenahealth’s operating effectiveness. In most businesses, operating margin expands as sales grow because revenue increases get leveraged against fixed costs. At athenahealth, that hasn’t been the case. Despite rising sales, its operating margin has declined to 14% in 2017 from 17% in 2011.
Given that the company’s gone through five CFOs in four years, there’s also some validity to Elliott Management’s concern about turnover in the C-suite.
However, its other criticisms — of the company’s products, strategy, forecasting, and price performance — may not be as warranted. After all, athenahealth’s products are still delivering double-digit revenue growth, and that’s something that competitor Cerner Corp. can’t claim. It also shouldn’t be ignored that athenahealth’s trailing-12-month net income has gone from less than $0 to $86 million, that its earnings per share have increased from less than $0 to $2.10, or that the company’s share price has increased from $20 to $150 since 2010.
It takes time
A good argument could be made for athenahealth going private or becoming part of another company, though. As a publicly traded company, it’s obligated to make decisions that are in the interest of its investors, and sometimes that obligation can conflict with the long-term thinking of visionaries like Bush.
I suspect that Elliott is making its buyout offer public because Bush and athenahealth’s board want to stay on the course they’ve already set. But perhaps they’d be more willing to consider an offer from another company with deep pockets and a willingness to focus more on Bush’s vision than on short-term operating metrics.
For example, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), JPMorgan Chase (NYSE: JPM), and Amazon.com (NASDAQ: AMZN) are hunting for a visionary CEO for their healthcare initiative. The three companies are teaming up to reinvent healthcare, to improve outcomes and cut costs. Warren Buffett recently told investors that getting the right CEO in place for this initiative is critical, and arguably, Bush has the chops to succeed in that role.
It’s also possible that Apple (NASDAQ: AAPL) would be interested in acquiring athenahealth. It’s making a big push into healthcare, and in January it announced that athenahealth and health-records giant Epic had agreed to allow patients to store and access their health records in Apple’s Health app. Buying athenahealth outright could accelerate its efforts to become more deeply entrenched in the sector, particularly with primary-care doctors, so Wall Street analysts speculated last summer that Apple and athenahealth could be a good fit.
What’s next for investors
Elliott said in its letter that it could be willing to offer even more cash to get a deal done, if it’s allowed to review the company more thoroughly. That statement alone makes it seem the $160 figure is a starting point, rather than a final offer. Elliott also disclosed in its letter that other companies have kicked athenahealth’s tires in the past; the letter could be designed to bring those other companies back to the table.
Overall, you shouldn’t buy or sell any stock solely because of mergers-and-acquisitions chatter. Instead, focus on the company’s business and its market potential. In this case, athenahealth is a disruptive growth company that’s winning share in a huge industry. So adding it to your portfolio, regardless of whether a deal gets made, could be smart.
