Is Allscripts biting off more than it can chew?
ALLSCRIPTS, A LEADING electronic health record (EHR) provider, and private equity firm GI Partners have announced that they will jointly acquire and govern Netsmart Technologies, a privately-held healthcare information technology (HIT) firm specializing in behavioral health and human services. Allscripts will contribute its Allscripts Homecare business to the joint venture, in addition to $70 million in cash. GI Partners will contribute an undisclosed amount of capital which, in addition to third-party debt financing, enabled the partners to make the $950 million acquisition (Exhibit 1). Even from an observer’s perspective, the rationale for the deal is clear. Recognizing the enormous value to be unlocked both in revolutionizing homecare and breaking down the siloes between medical and behavioral health, Allscripts is leveraging a proven capital partner to facilitate its acquisition of Netsmart.
Homecare remains a transformational frontier in healthcare. Post-acute care – including care delivered via skilled nursing facilities, inpatient rehabilitation facilities, long-term acute care hospitals, and home health agencies – does not represent the largest portion of national healthcare spending, but it is the primary source of spending variation. Also, for a population that’s getting older and sicker, post-acute care is rightfully a target for “triple aim” initiatives – targeting quality, patient experience, and cost of care – especially in light of national targets, like HHS’ goal to tie 50% of Medicare payments to value-based payment arrangements by 2018. Homecare in particular may hold the greatest opportunity for improvement and cost savings. The home is the least cost-intensive setting for care, and it also happens to be preferred by most patients and their caregivers. Moreover, the “consumerization” trend in healthcare is particularly applicable for homecare. User-friendly devices and applications should improve remote monitoring capabilities, increase access to care (both medical and behavioral), and meaningfully connect patients with their physicians, nurses, care managers, social workers, pharmacists, and others. Facilitating the secure and timely flow of patients’ information between various providers and entities across the healthcare network is another element critical to realizing this opportunity.
The Allscripts-GI Partners deal is clearly motivated by the attractiveness of today’s homecare market, and it could be smart bet, especially when you look at the players involved.
Allscripts initiated a preliminary relationship with Netsmart in 2014. At that time, Netsmart was pursuing a series of nonexclusive contractual arrangements with other EHR providers, including Cerner and Epic, seeking interoperability and integrating its behavioral health electronic records. This week’s joint venture transaction therefore represents a logical ramping-up of that relationship, likely with an eye towards full acquisition in the future.
Beyond those contractual relationships, Netsmart CEO Michael Valentine and Allscripts CEO Paul Black share a history as colleagues. Both served in executive positions at Cerner: Black ultimately served as COO until 2007, and Valentine succeeded him in that role until his transition to Netsmart in 2011. Valentine will take over the JV CEO position: That appointment could be a testament to complementary leadership styles and a strong working relationship. The quality of their relationship may also end up being asset in managing the new JV. Aligned CEOs at the shareholder and JV levels should minimize disruption to the existing Netsmart organization and preclude major cultural misalignments that could complicate the partnership ahead.
Finally, there’s the proven track record of the private equity partner, GI Partners, and its well-grooved approach to healthcare investments. While GI does not exclusively invest in healthcare businesses, its portfolio in recent years has been marked by a number of successful healthcare investments. These include Plum Healthcare, one of the fastest growing skilled nursing companies in the U.S., in addition to behavioral health service companies Advoserv and the Cambian Group in the UK. In each case, GI’s investment lasted between 6 and 10 years, and resulted in either a lucrative sale to another private equity firm or, in the case of the Cambian Group, an IPO. While none of those previous transactions were joint ventures, GI’s involvement with the Netsmart deal shares some similarities. It brings an undisclosed amount of cash to the table (reports indicate that Allscripts and GI, along with third-party financing, have acquired $950 million worth of stakes in Netsmart from previous private equity partner Genstart Capital) and retains some operating authority over the entity. In the case of the Netsmart JV, GI Partners will hold three of the seven voting Board seats – Netsmart CEO will hold one seat, and Allscripts will appoint the remaining three (in addition to approval authority over key matters like the JV’s annual budget). The JV agreement also specifies a five-year initial timeframe for JV operations, which resonates with any private equity firm’s preferred time horizon for successful investments.
So where’s the risk? It’s in the set of dissimilar partners who are likely bringing divergent sets of expectations to the table, especially with regards to managing, growing, and ultimately monetizing the asset. Even if Allscripts’ ultimate goal is to acquire Netsmart outright, it needs to deal with its joint venture reality for at least the next five years – and joint ventures are uniquely challenging, thanks to their shared-ownership, shared-control paradigm. When companies apply their M&A due diligence framework to joint ventures, without appreciating the incremental complexity of JVs, they tend to seriously underinvest and miss critical topics like strategic partner due diligence. In setting up this deal, one hopes that the partners appreciated how potentially conflicting their opinions might be on matters like investment profile, appetite for risk, and growth trajectory for the JV – and the implications of their variant viewpoints for governing the JV.
For a near 50:50 JV with equal Board seat allocations, misaligned partner perspectives can stall or even severely damage JV performance. Contradictory decision-making styles and cultures, along with conflicting strategic drivers and dissimilar partnership resumes, can further exacerbate governance challenges. Consider this: while Allscripts will commit viable business assets to the JV – its Allscripts Homecare business, its transition services via contracts, and its intellectual property via licensing agreements – GI Partners is likely to control the funding necessary for the JV’s growth. Moreover, the JV Operating Agreement features non-compete arrangements to prevent the JV from cannibalizing parts of Allscripts’ core business. In an unfavorable light, those arrangements could be viewed as unduly restrictive on the JV’s scope and growth path.
This is all to say that the Allscripts-GI Partners joint venture might be set up for success, but only if success is defined as a full acquisition of Netsmart by Allscripts. Ultimately, the business must first survive a trial period as a joint venture.