Allscripts, Eclipsys Deal: A Tough Sell?

(Allscripts, Eclipsys merger story updated for Wednesday close of trading, merger analysis)

CHICAGO (TheStreet) -- Allscripts-Misys Healthcare Solutions (MDRX) and Eclipsys (ECLP) announced a complicated merger transaction on Wednesday morning, but the market reaction was simple: sell shares of Allscripts-Misys.

Shares of the health-care information technology stock were down just under 10% at the close on Wednesday, and the 18.6 million Allscripts-Misys shares traded on Wednesday represented a huge spike over the company's average daily volume of under one million shares.

The health care information technology space has seen its profile raised over the previous year and a half since the federal government announced a program to reimburse hospitals and doctors for making the move to the electronic records management systems sold by companies like Allscripts-Misys and Eclipsys.

While these stocks have rallied on the expected boom in sales resulting from the federal stimulus, they have also declined significantly when the sales booms have not come quickly enough.

The big drop in Allscripts-Misys shares on Wednesday, though, was a reflection of all the unanswered questions inherent in a complicated financial transaction.

In initial reaction to the deal, analysts did not seem to doubt the long-term benefit of the transaction. Allscripts has a focus on the physician market and Eclipsys has focused on sales to hospitals and the argument can be made that bringing the two market strengths together could be, as Allscripts contends, accretive to earnings over a long-term time horizon.

At a more granular health care sales and marketing level, hospital groups have been increasing their sponsorship of physician practices of late, actually paying the upfront costs associated with the migration to electronic records for physician practices with which they are aligned. The merger would insulate Allscripts from losing business that might migrate to hospital sales due to this recent trend, but it would be going too far to see this trend as a driver of a large and complicated merger.

However, these health care IT stocks have been very sensitive to any shortfalls in sales, as investors had rewarded them handily in 2009 based on the federal stimulus, sending share prices ever-higher. Given the complicated nature of the transaction announced on Wednesday, analysts posed the logical question of management having a hard time keeping their eye on the "sales ball" with four to six months of merger work ahead of them.

Analysts said Allscripts is going to have to begin the work of selling this deal to shareholders of Eclipsys immediately. The premium inherent in the deal -- Eclipsys shareholders were to be issued 1.2 shares of Allscripts for one share of Eclipsys -- a 19% premium based on Tuesday's closing price that was already being eroded with the big dip in Allscripts shares on Wednesday. The fact that the deal is a $1.3 billion all-stock transaction makes the road-show aspect of the deal critical to receiving approval from all shareholders.

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