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Health Care Takeover Targets: Rumors Run Rampant

Stocks in this article: DELL GOOG ORCL GE MDRX EM UNH AET ATHN CERN QSII CPSI MCK SWK SI

(Health care information M&A report updated for valuation plays, Emdeon, Omnicell; top M&A pure-plays, Quality Systems, Cerner)

NEW YORK ( TheStreet) -- Last year was a big year for health care sector M&A activity focused on the theme of information technology, but don't fret if you missed the investment opportunity. This year may showcase an even larger parade of M&A deals based on the health care IT play, and ever-bigger deals as the industry consolidates its arguably scarce commodity.

In 2011, "M&A activity in the health care IT industry will rise to dizzying heights," says Leo Carpio, health care analyst at Caris & Company.

Last year, the HITECH program (the federal stimulus system intended to spur the evolution of an information age medical industry) fueled healthy M&A activity. Interest in deals should be sustained with the first HITECH program checks actually being cut and mailed out to recipients in 2011.

The 2010 deal-making culminated in Allscripts Health Solutions' (MDRX) $1.3 billion acquisition of Eclipsys.

In 2011, Caris & Company expects large deals like the Allscripts/Eclipsys transaction to stand out to a greater extent, as transactions in the range of $250 million to $1 billion will be the sweet spot for health care IT M&A in 2011, and some deals will rise to the $1 billion to $3 billion range. Small deals will continue to be pursued, as health information companies are bulked up for eventual spin-offs and become even larger acquisitions candidates, too. At the top of this list, according to Caris, is takeout target Emdeon (EM).

HMOs will continue to migrate operations to the cutting edge of the information age -- UnitedHealth Group's (UNH - Get Report) subsidiary Ingenix was the health care IT consumer on the biggest shopping spree in 2010, making five deals and spending roughly $2 billion. Aetna (AET - Get Report) acquired Medicity for $500 million this past December.

The tech giants will continue to expand their scope in the health care space. Oracle (ORCL - Get Report) acquired Phase Forward in 2010, a provider of applications to life sciences companies and health care providers. Michael Dell was talking up acquisition opportunities this week at the Davos World Economic Forum, and Dell already has a "dating relationship" with privately held eClinicalWorks.

Outgoing Google (GOOG) CEO Eric Schmidt was talking up the need for cloud-based health care information technology at the recent JPMorgan health care conference. Even though the Google chief was clearly on the side of open source technology, his comments stoked never-ending rumors about software as service (SasS) solutions already in the health space, like Dell's partner eClinicalWorks, and the only publicly traded, pure-play cloud computing health care IT company, Athenahealth (ATHN - Get Report).

The stock premiums to result from M&A activity may be realized in some pure-play health information stocks, like Athenahealth and Quality Systems (QSII - Get Report), but there's health care IT M&A value embedded in the shares of the HMOs and the broader health care stocks universe -- for example, a diversifying health care vendor like McKesson (MCK - Get Report).

Yet with many of the health care information plays trading at or near 52-week high levels already, classic big spenders in the space like Siemens (SI) and General Electric (GE - Get Report) may be reluctant to spend big bucks on acquisitions, unless the health care IT stock multiples contract significantly.

As Auriga Securities health care analyst Gene Mannheimer noted recently, "the 'good news' may be in health care IT stocks already, as we enter the first full year in which stimulus funds will be awarded under the HITECH act. If true, upside could be limited, unless buyers are willing to award a step-up in valuation while simultaneously justifying the premiums to their boards."

It's also possible that scarcity of top quality health IT properties and a ticking clock will trump the skeptical valuation argument. In any event, here are some health care companies and health care M&A themes that should be in play as M&A rumors run rampant, again, in 2011...

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