Quality Systems Seen Luring Bids Amid Pressure: Real M&A

Quality Systems Inc.’s 55 percent plunge since 2011 and intensifying pressure from an activist investor has turned the developer of health-records technology into takeover bait for Siemens AG and McKesson Corp.

The $1.3 billion company is weighing its options after shareholder Clinton Group Inc. won board seats following an attempt to oust Chairman Sheldon Razin. Suitors can pick up the assets on the cheap, with Irvine, California-based Quality Systems valued at 11 times profit, less than the peer median of 19, according to data compiled by Bloomberg.

Quality Systems’ network of more than 90,000 physicians, coupled with prospects for increased digitization of patient data, may make it an appealing target for McKesson, Siemens or UnitedHealth Group Inc., according to B. Riley & Co. and Cowen Group Inc. Buying Quality Systems is a way to expand rapidly into doctors and dentists’ offices, which may help suitors overlook the company’s recent sales slowdown.

“The stock has been pretty much dead money for over a year,” Gene Mannheimer, a San Diego-based analyst at B. Riley, said in a phone interview. However, “the valuation is attractive. Quality Systems enjoys a very vast footprint of doctors and has a well-respected and ubiquitous product.”

Banning Founder

The escalation in shareholder pressure began last year, when director Ahmed Hussein agitated for changes. He resigned in May 2013. Then, on July 1, Quality Systems said Clinton Group was seeking changes to the company’s bylaws that would have prevented Razin, the founder, from staying on the board.

Quality Systems resolved the dispute with Clinton Group on July 17 by agreeing to nominate three directors selected by the investment firm. Two of those three board members will join the five-person transaction committee, which is charged with evaluating Quality System’s strategy, the company said.

“We are pleased the board has agreed to conduct a full and objective review of the company’s strategic alternatives and believe that some of those alternatives may offer stockholders significant benefits,” Gregory Taxin, president of New York-based Clinton Group, wrote in an e-mail. “We look forward to the results of the board’s process.”

Susan Lewis, a Quality Systems spokeswoman, declined to comment on whether the company is considering a sale as part of its strategy review or whether it’s been approached by suitors.

McKesson, Siemens

The review is more likely to prompt a sale of Quality Systems rather than lead to the company pursuing its own acquisitions, Greg Bolan, a Nashville, Tennessee-based analyst at Sterne Agee Group Inc., wrote in a July 18 report.

He said that San Francisco-based McKesson, the largest U.S. drug distributor, could boost its increasing presence in doctors’ offices by acquiring Quality Systems. That would fit with its purchase this year of PSS World Medical Inc., which sells medical supplies and services to physicians. McKesson, with a market value of $28 billion, agreed to pay $1.8 billion, according to data compiled by Bloomberg.

Siemens, the 71 billion euro ($94 billion) conglomerate based in Munich, makes sense as a buyer in part because of the companies’ relationship, Bolan said. In 2005, Siemens agreed to sell Quality Systems’ outpatient medical-records systems along with its own offerings. Lewis, the Quality Systems spokeswoman, said the companies still have a “working relationship.”

Quality Systems could also fit with a health insurer that has a technology arm, including Minnetonka, Minnesota-based UnitedHealth, Cowen’s Charles Rhyee said in a phone interview. The New York-based analyst agreed that McKesson and Siemens also make sense.

‘Why Build?’

The most likely bidders for Quality Systems are companies with hospital expertise that want to expand into outpatient medical centers, he said. “Why build yourself when you can just acquire Quality Systems?”

Matthias Kraemer, a spokesman at Siemens, said the company doesn’t comment on deal speculation. Tyler Mason, a spokesman at UnitedHealth, and representatives at McKesson didn’t return phone calls or e-mails seeking comment.

Quality Systems’ enterprise value yesterday was 11 times the company’s earnings before interest, taxes, depreciation and amortization from the past 12 months, data compiled by Bloomberg show. Cerner Corp., Allscripts Healthcare Solutions Inc. and Athenahealth Inc. fetch higher multiples.

About $1.6 billion has been erased from Quality Systems’ market value since the stock closed at a record $50.05 in September 2011. In the company’s fiscal year that ended in March, sales increased at the slowest rate since 1995, and Quality Systems posted its first quarterly revenue decline in more than a decade this year, the data show.

Deal Premiums

While growth has been slowing for Quality Systems, its recurring revenue from current customers is an attractive feature for suitors, said Michael Cherny, a New York-based analyst at International Strategy & Investment Group LLC.

Buyers have paid an average 32 percent premium in takeovers of U.S. medical-information systems providers larger than $1 billion, data compiled by Bloomberg show. That would imply a bid of about $29.82 a share for Quality Systems, or 40 percent less than the 2011 peak.

Today, Quality Systems shares rose 1.2 percent to $22.87, climbing for a third straight day.

“Even with a premium from here, the stock would still be well below its all-time highs,” Cherny said in a phone interview. “But with fresh blood coming to the board, nothing’s out of the question.”

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