Merge eFilm makes play for Cedara Software

RIS/PACS developer Merge eFilm and Canada's Cedara Software have signed a definitive agreement to merge. The all-stock transaction, announced Jan. 18, is valued at about US$390 million. Barring unforeseen problems, the deal could be done by April.

The two companies will benefit from opportunities opening up through a highly complementary mix of products. Improved time to market for new products, cross selling opportunities, and cost savings are expected to arise from the consolidation.

"We believe in the product innovation synergies between OEM and full RIS/PACS workflow solutions," said Merge president and CEO Richard Linden, who will carry those titles over to the new combined company. "Together we can accelerate our ability to enter new medical imaging markets in clinical specialties and to be a catalyst for changing the definition of RIS/PACS in clinical and business workflow."

Merge eFilm specializes in RIS/PACS products designed for imaging centers, clinics, and small to medium-sized hospitals. The company also produces DICOM toolkits for use by OEMs, but these account for a relatively small part of its overall sales. Cedara is the ying to this yang, selling and licensing software primarily to OEMs. Its recent foray into PACS, namely its acquisition last year of e-Med Technologies, is the major exception. This focus on OEMs, however, is seen not as a stumbling block but as an advantage by Abe Schwartz, Cedara's president and CEO.

"We can create an industry-altering model and offer our customers a better, larger company that provides the credibility necessary to address the needs of our niche markets," said Schwartz, who will serve as a member of the newly created company's board of directors.

Merge will issue either 0.587 Merge common shares or 0.587 shares of a newly created class of Canadian exchangeable shares for each common share of Cedara. The exchange rate was established to provide a 17.5% premium to Cedara's 20-day average share price.

The transaction is expected to be accretive to Merge eFilm's earnings per share in 2005, excepting the impact of one-time transaction costs. The combined company, which will be headquartered at Merge eFilm's current headquarters in Milwaukee, will have a revenue run rate exceeding US$100 million.

"Together we have increased financial strength, international presence, and product breadth and depth," Linden said.

The proposed merger smacks of empire building, as the two firms seek increased scale through a combination of companies with obvious synergies that go beyond their individual product lines. Merge eFilm is largely a RIS/PACS company focused heavily on U.S. imaging centers and hospitals. Cedara is a software company with a heavy footprint in Asia. Since late 2002 Cedara has struck alliances with several firms in China to distribute its digital x-ray, PACS, and 3D imaging technologies. It opened a Shanghai office in May specifically to pursue new opportunities in that country.

The complementary nature of the involved parties and the scale of the proposed deal also play well from other angles. Cedara's involvement with OEMs, particularly licensing software toolkits to assist in the development of imaging products, could provide Merge eFilm invaluable insights into R&D trends.

"Operationally, we expect to continue our dual-product innovation and distribution strategy by innovating OEM medical imaging products in partnership with our important OEM customers and incorporating those products into integrated end-to-end workflow solutions for our end-user healthcare customers," Linden said.

Cedara's expertise in postprocessing software could be of substantial value to the evolution of Merge eFilm's Fusion RIS/PACS technology. The Canadian company's aggressive development over the past several years of specialty applications designed for orthopedics, cardiology, gastroenterology, and mammography might be especially helpful, as PACS vendors increasingly are developing specialized IT products for medical disciplines outside radiology.

Finally, the scale afforded by the union will provide an edge not only in the OEM marketplace but also in the RIS/PACS segment, which is populated by a mix of multinational companies and small innovators.

"Customers will be better off because they will deal with a company that is much stronger financially and can give them a one-stop shop environment for products," Schwartz said.

There are, however, some substantial redundancies. Merge eFilm is still in the process of digesting AccuImage, a company whose purchase just prior to the RSNA meeting in November was driven ostensibly by the need to obtain 3D imaging software for integration into Merge eFilm's RIS/PACS. Cedara built its considerable reputation on high-powered postprocessing algorithms, particularly those addressing 3D.

On the other side of the coin, Cedara only completed its acquisition of PACS provider eMed Technologies in October. How the combined Merge eFilm/Cedara handles these two competing PACS will reflect on its corporate character and the way it does business well into the future.