Sage Rx in the US as it acquires medical software specialist

by admin on August 10, 2006

in General

Accounting software giant Sage took a huge gamble as it announced Tuesday closing the acquisition of Endeon Practice Services in the US for $565 million cash. That’s an acquisition cost per EPS customer of $25,680. Phew!

In its parent company’s 2005 annual report, EPS disclosed revenues of $304.1 million and earnings of $29.4 million. That’s a miserly 9.6% net.

According to syndicated reports, Sage CEO Paul Walker said it will allow Sage:

…to market its products and services to a substantial new community of small and medium-sized businesses in the US…[to offer] an integrated Sage solution to both new and existing Sage customers in the US, covering accounting, health records and practice management

When you look in detail, Sage is going to have its work cut out.

  • EPS appears to be in maintenance mode, having grown its business in FY2005 by 2.7%. The six months to 30th June, 2006 have seen virtually no revenue growth though earnings have risen significantly over the comparable period in 2005 to $22.3 mill or 14.6% of revenues. Way below where Sage likes to be. Assuming that tracks forward for the year then Sage is paying roughly the equivalent of 13 years current profit.
  • There is overlap because EPS has billing capability. This means Sage needs to do some re-engineering to make a medical services version of its US products.

Sage has a good record of turning around its acquisitions but I can’t help thinking that on a first pass, this looks like a mighty price to pay for what’s really a slice of market share. The market seems to agree. Oh yes – and even less money for innovation (had to get that in :P )

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Jason C August 11, 2006 at 7:31 pm

Yes the price as a ratio to sales is a bit higher than many of Sage's recent acqusitions (some of which were aquired for 1x or less of sales), but so was the deal for Verus.

In a lot of ways this fits the profile of a typical Sage acquisition…they are buying
1. A legacy product that is in maintenance mode with low organic growth rates, so R&D spend is already low or could be significantly lowered
2. Operating margins below Sage's typical mid to high 20's, so cost cutting can have a quick impact on EPS
3. Sizable customer base in the SMB market
4. I haven't pulled up the 10-K to check this one yet, but Sage generally prefers companies that have a low penetration rate of support and maintenance contracts, so they present a significant opportunity to drive services revenues from the existing base

This is business model focused on delivering great value to shareholders, but one that make current and potential customers quite wary

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