Deal or no deal?

With a full blown bid for iSoft by Australia’s IBA Healthcare now appearing imminent, a number of pressing questions are raised by the potential deal.

Not least, is whether the acquisition of the principal clinical software supplier to the NHS IT programme by a smaller Australian rival would best serve the interests of the NHS?

First, it’s worth remembering that iSoft is not spoilt for choice of suitors. IBA Health is the only potential bidder to yet identify itself publicly. Press reports suggest that the likes of health IT giant McKesson withdrew after taking an initial look.

After a suffering a litany of body blows in the past 18 months – most notably mounting delays in delivering the key Lorenzo product, ongoing regulatory and financial investigations and being forced to restate its accounts – iSoft has seen its stock market valuation plummet, together with City confidence.

Since taking over at the helm last summer executive chairman, John Weston, has managed to bring stability and cut costs sufficiently to ensure the company remains a going concern until November. But it must deliver the next generation Lorenzo product to its key LSP customer, Computer Sciences Corporation, and has a pressing requirement to secure long-term funding or find a buyer.

The key question for NHS customers remains whether IBA will be able to deliver Lorenzo any quicker or more effectively than iSoft or whether it would instead offer alternative products – potentially iSoft legacy products. The current stated delivery deadline for Lorenzo is early 2008; would an IBA acquisition make this more or less likely to happen?

IBA after all effectively exited the English NHS IT market as far back as 2003 when it sold its hospital information systems business to Torex Health, prior to Torex being acquired by iSoft. The Australian company may in reality be as interested in the opportunities the iSoft acquisition creates in Asia as the English NHS.

IBA clearly believes it can achieve value for its shareholders from an all paper-funded deal. In part this is because, despite its debts, iSoft offers a potentially attractive revenue stream – IBA has indicated it believes that iSoft could carry more debt than it currently does.

IBA projects that it will achieve earnings of £13.3m on revenues of £31.25m in 2007, against earnings of £7.9m on revenues of £24.5m in 2006. iSoft by contrast is expecting revenues for the full year ending 30 April 2007 to be up to £181m – almost five times those of IBA. However operating costs for the first half of the financial year, before exceptional items, were £86m.

For IBA – as well as massively increasing its revenues and gaining pole position in the English NHS – a key part of the attraction of a deal surely lies in the burgeoning Asian market where iSoft has been strong traditionally and IBA is fast growing.

To fund the deal IBA is seeking £82m of new equity and negotiated a total debt facility of £130m for a merged company. To help offset this debt IBA says it believes it can achieve £11m efficiency savings from the merged companies by 2009.

There does not at this stage appear to be a major injection of capital planned to revitalise the Lorenzo software development programme. In addition, IBA has no obvious track record of project managing a software engineering project on this scale.

Will, as the lawyers say, there be any Connecting for Health sanctioned "easement" of the terms of the contract that iSoft has with CSC for delivery of Lorenzo, with Lorenzo ambitions diluted to updated web-enabled version of the existing iPM and iCM products?

If an offer is made by IBA Health, and subsequently accepted by iSoft’s shareholders, it will represent a coup for the far smaller Sydney-based IBA Health and its indomitable chairman, Gary Cohen. It would also mean that current IBA chief executive Steve Garrington makes a dramatic return to what was once Torex Health, the company he ran until 2003.

A deal would represent the culmination of a turbulent history between the two companies over recent years, in which IBA has brought legal challenges against iSoft and its then chief executive Chris Moore.

Only four years ago IBA Health had in effect been shut out of the UK market after its UK partner Torex was bought by iSoft. As the NHS IT programme procurement reached its climax the new owner had less interest in marketing non-iSoft products.

For iSoft to now be acquired by IBA Health would surely be a sweetly savoured victory for IBA and mark the wheel turning full circle from 2003 when Torex plc bought the UK Hospital Information System operation of IBA and InHealth Solutions for £7m.

As part of the deal Torex took an 8% stake in IBA Ltd, a leading Australian supplier of e-health and hospital information systems. The deal saw Torex’s then-chairman Chris Moore join the IBA Board.

Later in 2003 iSoft announced plans to acquire larger rival Torex as it sought to rapidly grow ahead of NPfIT procurement decisions.

In November of the same year Australian-based healthcare information systems supplier IBA announced it would apply to the UK’s Competition Appeal Tribunal for a review of the decision of the Office of Fair Trading (OFT) not to refer the proposed merger between iSoft Group plc and Torex plc to the Competition Committee.

In a separate legal action IBA began legal action against Chris Moore, the former CEO of Torex who was briefly chief executive of the newly merged iSoft before being asked to step down by the board.

IBA filed a claim in the High Court against Moore, for more than £50,000 alleging he breached his ‘fiduciary duty’ and had improperly used confidential information while he was a member of the IBA board from May to August 2003.

IBA alleged Moore had failed to serve the interests of IBA shareholders while he was a director of IBA, since, as chairman of Torex, he was also negotiating its merger with iSoft, a direct competitor of IBA. Moore resigned from the IBA Board in August 2003

Sources indicate that IBA was frustrated at what it saw as iSoft’s failure to market its [IBA’s] software, as per agreements signed between IBA Health and Torex prior to the merger.

In a further twist in the current takeover story, IBA Healthcare’s current chief executive Steve Garrington was previously chief executive of Torex Health, briefly serving as iSoft’s chief operations officer after the iSoft/Torex merger.