At last – some good sense from Sage management although it is tinged with a bad idea. In an announcement going out over the wires right now, Sage is offloading its healthcare division to private equity. From the blurbs:
The Sage Group plc (”Sage”) today announces that it has reached a definitive agreement to sell Sage Software Healthcare LLC (”Sage Healthcare”), its subsidiary offering practice management and electronic health record solutions to US physician practices, to Vista Equity Partners. The cash proceeds for the sale are $320m (£205m*) and the sale is expected to complete in November 2011. Sage intends to return all of these proceeds to shareholders through a share buyback programme.
Back in 2006, Sage acquired Emdeon, which morphed into Sage Healthcare, for $565 million. Today’s price means Sage has taken a $245 million hit or 43% of the original price but in reality that reflects a decline in revenue and earnings. At the time I said:
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 )
Report after report indicated that not only had Sage been sold a pup but it was unable to turn the division around, at best reaching a stable situation. On this occasion, Sage is attempting to soften the embarrassing blow by mollifying shareholders. Except that will not work.
Meetings I have attended and reports I have seen tell me that while shareholders have high expectations of Sage performance, they know the company is not investing enough in innovation. While it may look like a good idea to send money back to shareholders, it only matters if the share price reflects that in the long term and performance stays on target.
Sage has many levers it can pull to keep the market happy but that won’t be enough in the long term. Companies that fail to innovate but which have strong maintenance streams only enjoy that luxury for a limited period of time. They either get acquired or taken private while specialists milk the last ounce of goodness out of the business.