Economy. Q Healthcare Information Technology Review and Outlook. Contact:

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1 Q Information Technology Review and Outlook Contact: IT Maintains Stability in Recovering Economy W hile the broader markets continue on their road to recovery, the healthcare information technology (HCIT) sector is forging ahead, particularly in relation to M&A activity. reforms, regulatory mandates and technological advances have created a period of growth and investment in HCIT that BDO Capital expects will continue. Not only are strategic and financial buyers sitting on stockpiles of cash, but HCIT companies are in high demand due to favorable market forces and industry drivers that will be discussed later in this newsletter. For many industry players, consolidation will be necessary for survival as HCIT undergoes a rapid evolution over the next few years. Read more VALENTINA MIDURA Managing Director BDO Capital Advisors, LLC 100 High Street Boston, MA Direct: Mobile: vmidura@bdocap.com Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm s individual needs. BDO Capital Advisors, LLC Member FINRA/SIPC BDO Capital Advisors, LLC is a separate legal entity and is an affiliated company of BDO USA, LLP, a Delaware limited liability partnership and national professional services firm.

2 2 BDO Capital M&A Newsletter reforms, regulatory mandates and advances in technology have created a period of growth and investment in HCIT that BDO Capital expects will continue. u HCIT Market Overview The economy struggled to regain its footing throughout 2012 after Europe dominated the news in the second half of 2011 with a major crisis followed by several bailouts. U.S. broad market indices followed the news headlines from Europe, leading to a volatile equity market, with some sectors seeing an uptick in fourth quarter activity given pending capital gains increases. While also experiencing a certain amount of volatility, U.S. HCIT performance and activity in the public and private sectors have generally been more bullish. As seen in Figure 1, BDO Capital s index of public U.S. HCIT companies has outperformed the S&P 500 and Nasdaq indices. reforms, regulatory mandates and advances in technology have created a period of growth and investment in HCIT that BDO Capital expects will continue. In 2009, the Health Information Technology for Economic and Clinical Health (HITECH) Act provided more than $19 billion to incentivize the U.S. HCIT industry, with a focus on electronic health and medical records (EHR and EMR) advancement. While already an industry working to keep pace with changing technologies and regulations, the HITECH Act provided the funds necessary to revitalize HCIT development and activity. Also enacted under President Obama s term is the Patient Protection and Affordable Care Act (PPACA or Obamacare), upheld by the Supreme Court in June By mandating requirements such as health insurance coverage, increased health benefits reporting, quality care incentives and best practices documentation, this Act increases the need for HCIT efficiencies and quality of care evaluation processes. Figure 1 U.S. Stock Market Indices 150% 140% 130% 120% 110% 36.6% 19.1% 17.4% 100% 90% 80% U.S. IT Public Companies NASDAQ Composite Index (^COMP) S&P 500 Index (^SPX) Source: S&P Capital IQ: 1/3/11 through 2/28/13; BDO Capital U.S. IT index: STRM, MRGE, OMCL, QSII, ATHN, GWAY, SLP, MDRX, EPOC, CERN, CPSI, HSTM, ICAD, ADAT, MGT, MDAS, VCRA, MDSO

3 BDO Capital M&A Newsletter 3 In addition to the funding that the HCIT sector has received, U.S. public healthcare companies and financial buyers are sitting on stockpiles of cash... viable liquidity and purchase options for the high-growth HCIT sector are provided through the M&A market. u M&A Market Overview In addition to the funding that the HCIT sector has received, U.S. public healthcare companies and financial buyers are sitting on stockpiles of cash (approximately $240 billion and $350 billion, respectively) and have expressed interest in HCIT investments. Viable liquidity and purchase options for the high-growth HCIT sector are provided through the M&A market. As seen in Figure 2, 2012 M&A volume increased 20 percent over 2011 to close the greatest number of deals in the sector in the last eight years. A drop in value of 54 percent from 2011 to 2012 indicates an increasing trend of unreported values in the middle market, as well as an overall decrease in average deal size. BDO Capital anticipates increased M&A activity as healthcare IT spending and industry consolidation continue. Figure 2 U.S. Middle Market IT M&A Activity Value ($ millions) 1,800 1,600 1,400 1,200 1, Aggregate Enterprise Value Closed Deals Source: S&P Capital IQ; represents closed deals valued from $10 million - $250 million; deal count includes deals with undisclosed values Number of Transactions Francisco Partners Management, LLC has been an active financial buyer in relation to HCIT M&A activity recently. Earlier in 2012, through API Corporation, an existing portfolio company that provides workforce management technology to the healthcare industry, Francisco announced the acquisition of Concerro, Inc. Concerro is a leading Software-as-a-Service (SaaS) company that helps health systems effectively manage their workforce and mission-critical communications with online scheduling, open shift management, patient acuity and emergency preparedness solutions. On the strategic side, Nuance Communications, Inc. (Nasdaq:NUAN), Quality Systems Inc. (Nasdaq:QSII) and McKesson Corporation (NYSE: MCK) have been active acquirers of U.S.-based HCIT companies over the past few years, either directly or through subsidiaries. As an example, in 2012 Quality Systems acquired The Poseidon Group, Inc. to strengthen its NextGen Inpatient Solutions offering, which provides small hospitals with a variety of HCIT services. The Poseidon Group provides emergency department documentation and web-based EMR solutions to the healthcare industry. Recently, non-hcit focused companies, such as ManTech International Corporation (Nasdaq:MANT), have also been making acquisitions in the sector to capitalize on the industry s positive market forces. Towards the beginning of 2012, MANT introduced HCIT to its federal repertoire with the acquisition of Evolvent Technologies, Inc., which integrates medical records and information across different platforms. u HCIT Segments in High Demand Continually evolving EMR and EHR solutions are vital to the HCIT industry, instigated by the HITECH Act. Mentioned previously, the acquisition of The Poseidon Group by Quality Systems serves as one example. Additionally, in November 2012, Pri-Med, a provider of professional medical education, acquired Amazing Charts, Inc., a provider of EMR and EHR solutions and services to healthcare practices. The acquisition was made to expand the EMR and EHR reach, to accelerate product development and to bring the latest medical knowledge to the point of patient care.

4 4 BDO Capital M&A Newsletter Figure 3 Public Company Performance Median EV/LTM EBITDA Figure 4 IT M&A Performance 18.0x 16.4x 16.0x 13.5x 14.0x 12.0x 10.4x 10.5x 11.4x 11.6x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x Source: S&P Capital IQ and private company data Median EV/EBITDA Multiple 18.0x 16.0x 14.0x 12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x 12.5x IT 9.5x Equipment & Supplies Source: S&P Capital IQ and private company data Consulting services are a second recurring theme in the HCIT industry, as industry customers strive toward meaningful use of EHR solutions, a reduction in healthcare costs, effective use of data in making more informed decisions and improved systems implementation. This theme is exemplified by a $493 million acquisition by Science Applications International Corporation (SAIC) (NYSE: SAI). In August 2012, SAIC s Vitalize Consulting Solutions Team acquired maxit Holdings, Inc., an IT and 8.4x 8.0x Services Distribution 6.7x Facilities 5.3x Managed professional consulting company providing clinical IT implementation services to healthcare providers. While allowing SAIC to leverage its expertise in systems integration, health sciences and data analytics, the acquisition is also intended to strengthen SAIC s provision of EHR implementation and integration services to its federal healthcare customers. As seen in Figure 3, healthcare IT is considered high-growth from a valuation standpoint, trading at the highest EV/EBITDA multiple in the healthcare industry of 12.5x, versus an average across sectors of 8.4x. Additionally, EV/EBITDA multiples for HCIT M&A transactions have been steadily increasing since the start of the recession, as seen in Figure 4. BDO Capital sees this industry as a hot sector pursued by both financial and strategic purchasers wanting to participate in the space. Investors are willing to accept low profitability for scalability potential and innovative technologies. Despite the latest economic uncertainty, recent HCIT multiples illustrate the premiums that are being realized for sellers whose businesses address changing industry conditions and needs. A third segment that is rising in the industry and is expected to contribute to M&A activity going forward is the increasing use of telehealth, telemedicine and mhealth, three interrelated HCIT solutions. Telehealth is the delivery of health-related services and information via telecommunications, inclusive of health and wellness as well as general medicine. Telemedicine, on the other hand, is a more specific term which refers to the transmittal of medical procedures and examinations through interactive media. mhealth is the implementation of healthcare, wellness and medicine (i.e., telehealth and telemedicine) conducted specifically through mobile devices, which are rapidly increasing in use, both for consumers and commercially. Medical practice groups and investors alike are realizing that these remote access technologies are beneficial to both physicians and patients and serve to lower costs. Big data is a term used to describe extensive collections and sets of data that require handling by specialized database and computing platforms. Big data and analytics serve as a fourth key segment in HCIT M&A activity, as meaningful data analysis has the ability to manage medical costs and improve quality of care. For example, electronic capture and analysis of successful diagnoses and treatments could serve to minimize current trial and error practices in the medical field. Big data for healthcare is still in its early stages, given the relative newness of digitization and electronic integration efforts; however, BDO Capital expects M&A activity to pick up as small data and analytics

5 BDO Capital M&A Newsletter 5 players join forces to survive against larger competitors and capitalize on synergies. In March 2012, Verisk Analytics, Inc. (Nasdaq: VRSK) announced an agreement to acquire MediConnect Global, Inc. MediConnect, a worldwide leader in innovative medical record retrieval, digitization and management for organizations and individuals, has developed unique solutions for health plans to meet critical regulatory requirements, evaluate quality of care and enhance the efficiency of reporting and analytics. VRSK is a leading provider of information about risk to professionals in a variety of industries. This acquisition will further advance VRSK s position as a major provider of data, analytics and decision support solutions to the healthcare industry. u Conclusion Macroeconomic concerns continue given persistent global uncertainty and factors such as lackluster job growth; however, thanks to a cash buildup on the part of strategic and financial buyers as well as increasing bank leverage, capital is available and the credit markets are improving. Additionally, there is pent up demand for deal flow and, due in part to the aging baby boomer generation, there has been an increase in the supply of business owners wanting to sell. As discussed herein, BDO Capital anticipates that HCIT will be a hot sector in M&A activity, in high demand and enjoying scarcity premiums as industry players continue on a roller coaster of evolution that promises action in an otherwise cautious environment. About Valentina Midura Ms. Midura is the head of BDO Capital Advisors Technology industry practice and has more than 13 years of investment banking experience. In addition to overseeing this industry vertical for BDO Capital Advisors, she also is primarily responsible for maintaining BDO Capital Advisors relationships with the private equity community. Ms. Midura is experienced in numerous transaction structures and processes including leveraged recapitalizations, the auction sale and a variety of other go-to-market techniques and deal structures. Ms. Midura has authored numerous industry and process-related articles and routinely participates in speaking engagements, presentations and industry symposiums. Her transaction resume includes the successful sale of over 30 companies with total client consideration value approaching $1 billion. Prior to joining BDO Capital Advisors, LLC, Ms. Midura served as a Director in the investment banking division of Andersen Global Corporate Finance, LLP, joining that group in While at Andersen s Boston office she was a key architect in the firm s investment banking technology go-to-market strategy and a contributor to the firm s growth across a variety of technology sectors including software, hardware and IT services. In addition to technology, Ms. Midura focuses on analyzing and processing value-enhancing liquidity alternatives for companies across a wide range of industries including manufacturing, healthcare, distribution, consumer products and business services. Ms. Midura began her career with Andersen, LLP providing global business consulting and regulatory advisory services to companies within the public and private sectors. Ms. Midura received her B.S. from the Whittemore School of Business at the University of New Hampshire. She is qualified as a General Securities Representative and is a Certified Public Accountant. Ms. Midura is also a member of the American Institute of Certified Public Accountants (AICPA), The Commonwealth Institute and ACG. VALENTINA MIDURA Managing Director BDO Capital Advisors, LLC 100 High Street Boston, MA Direct: Mobile: vmidura@bdocap.com

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