Synergies for the future

What did Cerner do? Well, they acquired the Siemens Health Service business for 1.3 billion Dollars, the deal was all cash, that part is the good news. It is immediately earnings accretive adding around 15 US cents to next years EPS and 25 US cents in the year after that. The press release says the following "By combining investments in R&D, knowledgeable resources, and complementary client bases, the acquisition creates scale for future innovation. As part of the agreement, Cerner and Siemens will form a strategic alliance to bring new solutions to market that combine Cerner's health IT leadership and Siemens' strengths in medical devices and imaging."


The deal does not stop there, as mentioned above the two companies will fund (50 million dollars each) projects for three years that benefits both lots of their clients. Siemens has an ADR market capitalisation of 101 billion Dollars, Cerner has a market cap as at last evening of 19 billion. The company (Cerner) trades on a commanding multiple, 40 times earnings. The PE unwind is pretty quick however (23 to 2016 from 40 currently), expectations are that the company will earn somewhere in the region of two Dollars a share next year and nearly 20 percent more than that in the following year. We continue to believe that digitisation of medical records and technology integration of hospitals to laboratories to patient rooms (and everything in-between) is only starting.


This is clearly positive for Cerner, the cash that they are shelling out works for their shareholders immediately. As you can see for Siemens, this is less of a big deal, almost exactly 1.3 percent of their market capitalisation. What they (Siemens) do get however is to partner with one of the leaders in digitisation of the healthcare sector, too much paper still exists which leads often to a breakdown in communication which compromises patients. Driving technology means cheaper and more efficient solutions for the patient ultimately, the right diagnosis and subsequent therapies are delivered faster, more efficiently and that saves money, driving down medical costs ultimately.


The conference call pointed out that Cerner does not do too many deals, this one however made sense for them. The company continues to invest heavily in their own business, planning to expand R&D investment to more than 650 million Dollars annually (relative to annual revenues of 2.910 billion), that is sizeable. The extras that Cerner get are a more global presence which has been lacking a little. The Siemens unit will add 1.2 billion in annual revenues (sizeable!) with pretax synergies (cross selling and cost saving) expected to be as much as 175 million Dollars by 2017.


There are deals done in this sector that have not worked, this is smaller in comparison for both companies concerned, normally it would be a Siemens acquiring Cerner in order to enter that market in a bigger way, this is different. Being earnings accretive immediately and bulking up on both customers as well as spreading their wings geographically, this is important. We continue to add to what is a great opportunity.