Microsoft’s acquisition of Nuance Communications might be the tip of the iceberg in Big Tech’s healthcare-focused M&A ambitions.
In early April, Microsoft (MSFT) – Get Report announced a blockbuster $19.7-billion acquisition of Burlington, Massachusetts-based healthcare-focused cloud and AI provider Nuance Communications (NUAN) – Get Report.
“Nuance provides the AI layer at the healthcare point of delivery and is a pioneer in the real-world application of enterprise AI,” Microsoft CEO Satya Nadella said of the acquisition. “AI is technology’s most important priority, and healthcare is its most urgent application.”
Given the similar focus of Microsoft’s competitors such as Alphabet (GOOGL) – Get Report, Amazon (AMZN) – Get Report, and Apple (AAPL) – Get Report on both AI and healthcare endeavors, and Nadella’s declaration that healthcare is the most urgent application of technology, there is reason to suspect more M&A action might be on the horizon.
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“With the Nuance deal, Microsoft is doubling down on its industry cloud play, in which healthcare is an anchor vertical,” Ben Alsdurf, lead healthcare consultant at Berlin-based consulting firm TLGG said. “Deals like this signal that, in healthcare, the battle lines between the FAMGA [Facebook (FB) – Get Report, Amazon, Microsoft, Google and Apple] companies will become increasingly clear as the scale of investments continues to grow.”
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In particular, Alsdurf suggested Apple could be eager to deploy some of its formidable war chest in the consumer health space, an area that the company has already courted success in via the Apple Watch’s healthcare-focused features.
“One potential area of investment is around electronic patient records, which intersects nicely with personalized health management, an area in which the iPhone and Apple Watch are already well positioned,” Alsdurf said.
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The broader patient records industry at the moment is quite concentrated, with three firms controlling about 75% of the market in U.S. hospitals, according to KLAS Research. Per the research firm’s 2020 report, Epic Systems leads the industry with a 29% share, followed by Cerner (CERN) – Get Report with 26% of the market and Meditech with 17%.
In terms of Apple’s ambitions, the idea of acquiring one of the market leaders is not entirely novel. In fact, TheStreet founder Jim Cramer attracted significant attention to the notion in early 2019, setting off a debate on Twitter by suggesting Apple could acquire Epic and then go after Cerner’s clients.
For now, the tech titan enjoys a strong relationship with Meditech, which has supported medical health records on the iPhone since late 2019. Were Apple to move beyond merely a partnership, significant smaller players in electronic medical records such as Computer Programs & Systems (CPSI) – Get Report and Allscripts (MDRX) – Get Report control the bulk of the remaining market.
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However, it should be noted that Apple might not just be bidding against fellow Big Tech players if it were to try to move into the health records space. According to healthcare advisory firm BDO’s 2021 Healthcare CFO Outlook, a significant portion of the healthcare industry’s CFOs are eyeing acquisitions at the moment, with just under one-third of those surveyed also considering plans to merge with another organization.
Assessing the M&A Appetite
To be sure, acquisitions the size of Microsoft’s Nuance deal are not expected to be the norm, especially as cash reserves remain key in a post-COVID world and valuations among the relatively few quality targets remain elevated.
“Healthcare is a resilient sector and has proved it can weather any economic cycle, but a surge in demand for deals is both a challenge and an opportunity,” Vin Phan, Partner and Practice Leader for Healthcare Transaction Advisory Services at BDO explained. “Due to the strong demand for healthcare M&A, there is ample capital with few quality assets which provides for challenges in deal-making.”
Similarly, while there is sufficient cash on the sidelines among both Big Tech and large healthcare companies, many firms may aim to assess internal growth opportunities before branching out into blockbuster M&A action.
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Indeed, even among big tech players like Apple and Amazon, large-scale acquisitions on the scale of Microsoft’s deal for Nuance are not part of business as usual.
In fact, Apple’s largest acquisition has been a relatively small $3-billion deal for Beats Headphone in 2014, while Amazon’s $13-billion deal for Whole Foods in 2017 is the only deal for the $1.6 trillion-dollar market cap firm that eclipsed the $10-billion mark. Both firms instead have historically homed in on acquisitions of smaller, often privately-held, players in key spaces such as healthcare and AI.
In that context, hopes of a similarly industry augmenting deal should be tempered to a degree despite the apparent attractiveness of the space overall.
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