Smart money goes bargain hunting: Is the stage set for an M&A frenzy in healthcare IT?

July 7, 2010

Not even two months have passed since a private equity firm snagged teleradiology provider Virtual Radiologic, but in that time the imaging industry has played host to several other such deals. The most recent was a bid by Hologic, announced earlier this week, to acquire privately held Sentinelle Medical. Others are Sonosite’s purchase of a different Canadian company, VisualSonics of Toronto, completed just a few days ago, and Covidien’s pending acquisition of ev3, a maker of interventional devices.

Not even two months have passed since a private equity firm snagged teleradiology provider Virtual Radiologic, but in that time the imaging industry has played host to several other such deals. The most recent was a bid by Hologic, announced earlier this week, to acquire privately held Sentinelle Medical. Others are Sonosite’s purchase of a different Canadian company, VisualSonics of Toronto, completed just a few days ago, and Covidien’s pending acquisition of ev3, a maker of interventional devices.

What’s surprising is not that deals are being made in these trying times-underscored by the worst market for vendors of imaging equipment in more than a decade. Far from it. The surprise is that consolidation is not in full swing.

Imaging reimbursement rates are falling. Scan volumes are leveling off-even declining, by some accounts. There’s blood in the water, and that usually draws sharks. Corporate waters finally are beginning to froth, but it’s over a mixed bag of fish.

If Sentinelle joins Hologic, the maker of patient tables and breast MR coils will pocket $85 million. The VisualSonics deal is valued at about $68 million, a price tag commensurate with the value the company’s microultrasound technology could bring hand-carried ultrasound pioneer SonoSite. Trending toward the higher end is Providence Equity Partners’ cash bid of $294 million for Virtual Radiologic. Eclipsing them all is Covidien’s proposed $2.6 billion deal to reel in ev3, whose business is characterized by a portfolio of interventional stents and balloons.

It is ev3’s portfolio and those of the other recent M&A targets that form a pattern on which to forecast the future: not big companies or small companies,not big deals or small ones, rather, what the companies offer. Big equipment has fallen from favor. Services, components, and disposables have come into vogue, setting the stage for the next great surge in M&A.

With this as the warm-up, the mega deals that traders are looking for in the healthcare market are likely to come in the space lined by Obama stimulus dollars. Last month’s bid by Allscripts for Eclipsys may be a sample of what’s just over the horizon. If the two healthcare IT companies become one, it will be on the heels of a stock swap valued at $1.3 billion.

These are the kind of deals traders love, the kind best consummated by companies of equal or near equal standing, the kind that drive an industry with portfolios expanded by complementary products. They are the kind that will characterize the next couple of years.