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Healthcare Contracts Acquisition Analysis

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In recent years there has been a flurry of consolidation via acquisitions within the Healthcare Information Technology (“HIT”) space.  As mentioned in a previous post, Trending Towards Healthcare, billions of dollars annually are spent under various contracts to address HIT high priority initiatives (e.g., technology integration into day-to-day activities and security breach mitigation).  Securing these large-scale HIT-vehicles can enhance value and attractiveness as an acquisition target.

There are 26 active HIT contract vehicles with a ceiling value of $1 billion or greater across healthcare agencies and sub-agencies, comprised of approximately 350 contractor awardees since 4Q07, an aggregate ceiling value of over $180 billion, and an average of 13 awardees per vehicle.  Within this broader group, consider the following eight services-based IT vehicles: MHS TEAMS, CDC CIMS, CMS ESD, FDA ICT21, FDA ELMS, NIH CIOSP3 (F&O and SB), and VA T4.  These eight have 270 positions.  15% of these positions have been acquired since their award and to date, approximately 20% of companies with a position on one or more of these eight vehicles have been acquired.  In brief, buyers without significant HIT experience are looking for companies that have an established presence within healthcare agencies to open doors and position themselves for future recompetes and new RFP opportunities; creating an opportunity to capitalize on the continued spending in an otherwise challenged budgetary environment

This analysis suggests several key takeaways how limited awardees, big value contracts can drive M&A:

  • Not all vehicles behave the same post-deal, and this influences value.  Buyers place a premium on companies with access to multi-billion dollar vehicles via a F&O position or one with the ability to “on-ramp” from a set-aside designation (e.g., VA T4, CMS ESD).  Vehicles that don’t transition may help it’s owner operator build quals, develop customer relationships, and produce cash flow, but likely doesn’t enhance M&A attractiveness
  • Previous contract / task order holders who lost a recompete opportunity are often highly motivated to regain access to these high value vehicles
  • Due to the “staying power” of many HIT initiatives, contractors on the sidelines are motivated to buy onto a contract vehicle if they want to be well-positioned for the next generation of these awards

HIT remains one of the priority market areas for many contractors’ M&A strategies.  Due to a strong desire to win work in the well-funded HIT space, we expect continued investment and consolidation for companies that possess these attractive vehicles or the requisite past performance to secure future vehicles.  We also anticipate heightened competition for the next generation of these vehicles, given both the magnitude of government spending on the current generation and the potential to enhance enterprise value.