(Allscripts, Eclipsys merger story updated for Wednesday close of trading, merger analysis)
Allscripts-Misys Healthcare Solutions
( 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.
Eclipsys shares ended the day up 2.7% on Wednesday with more than 11 million shares traded, versus an average daily volume of less than 700,000 shares.
Anthony Vendetti, analyst at Maxim Group, said Eclipsys shareholders could not be happy on Wednesday watching the Allscripts share price erode and being expected to approve a merger based on a premium that was already diminished. Of course, Allscripts has four to six months to rally its shares -- and the company released data showing that sales were ahead of schedule this quarter alongside the merger announcement.
Still, Vendetti said that the only party that clearly benefited today was U.K.-based health care company Misys, which owns a 55% stake in Allscripts and is a key part of the deal, as it seeks to exit its majority holding in the health care information business. Misys owns 55% of Allscripts and will reduce its holding to 10% as part of the merger. Misys will be getting a premium for its shares, which will then be sold in a secondary equity offering.
London-traded shares of
were up 11.5% on Wednesday.
"Long-term we think it is a positive; short-term we think the stock price will fluctuate within a range as opinions about the deal vary," Vendetti said about Allscripts.
Charles Rhyee, analyst at Oppenheimer & Co., said another key question inherent in the deal is the secondary offering of Misys' 45% stake in Allscripts shares.
Misys will sell in a secondary offering a minimum of 36 million Allscripts shares. Additionally, Allscripts will buy back from Misys, concurrent with the closing of the secondary offering, approximately 24.4 million of its Allscripts shares at a price of $18.82 per share, or $460 million in total, plus a payment of a premium of $117.4 million in connection with the sale by Misys of its controlling interest, for a total of $577.4 million.
After the closing of the merger, Misys will have a right to require Allscripts to repurchase an additional 5.3 million Allscripts shares for $100 million at a price of $18.82 per share, and an additional $1.6 million premium, all of which will be funded through cash reserves of the combined company.
Under the terms of the deal, Misys cannot receive less than $16.50 per share in the secondary.
After the near-9% decline in Allscripts shares on Wednesday, the shares were trading in the range of $16.80 to $16.85, or a one-day loss of just over $1.50.
The Oppenheimer analyst asked, for one, what incentive an investor would have to buy the shares being offered in the secondary at any price above $16.50, if the deal terms state that as a floor value? At the same time, Allscripts will be trying to rally its stock price to make a stronger case to Eclipsys shareholders about the premium they are being offered to merge.
The math of trying to figure out potential share dilution from the secondary offering, as it ultimately leads the Misys shares to become part of a larger pool of common Allscripts shares, is a work in progress, analysts said.
Maxim's Vendetti noted that Allscripts stated in the merger announcement that the deal would be accretive to earnings in 2011, yet the shares have dropped significantly on Wednesday, so the market is clearly not convinced of the earnings accretion math, versus potential share dilution resulting from the deal's financial mechanics.
"Allscripts stock should be up, or at least flat, if the Street believed that the deal would be accretive to earnings," Vendetti said. "If they can get the merger to work in the next few years it should be accretive, but we don't know by how much or by when, and Allscripts needs to sell the deal now," the Maxim Group analyst said.
The disconnect in the perceived long-term value of the deal to both health care information stocks and the short-term merger sell required of Allscripts will play out over the next four to six months, and the analysts seemed to think that, for at least a day, the only party sitting pretty was Misys, exiting its investment in Allscripts.
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-- Reported by Eric Rosenbaum in New York.
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