By Jian Wee Soh, Oscar Silver, Kai Ye, Tigran Minasian, Ross Barrett and Yagnesh Patel, (Imperial College London), Mathilde Heibig, Jinying Lui, Dorian Song and Pierre Six (HEC Paris)
Photo: Mingwei Lim (Unsplash)
Overview of the deal
Acquirer: Oracle Corporation (NYSE:ORCL)
Target: Cerner Corporation
Implied Equity Value: $28.3bn
Total Transaction Size: $29.2bn
Announcement date: 16/12/2021
Closed date: 8/6/2022
Target advisors: Goldman Sachs, Centerview Partners (Financial Advisors), Latham & Watkins (Legal Advisor)
Acquirer advisors: Hogan Lovells, Kirkland & Ellis (Legal Advisor)
US based software company Oracle, known for its cloud software applications and infrastructure, has agreed to acquire Cerner Corporation for $28.3 billion through an all-cash offer of $95.00 per share. Cerner Corporation is a leader in providing digital information systems used within the healthcare industry and has a strong expertise towards digitising medical care. This deal will be highly complementary towards both firms’ capabilities in the technological domain and will allow them to accelerate the development of healthcare information systems, leading to lower administrative workload for medical professionals.
Oracle intends to modernise the user interface of Cerner’s existing information systems by introducing a new generation of easier-to-use digital tools such as a hands-free voice interface, allowing medical professionals to be more efficient in delivering patient care services. With Cerner’s largest business and clinical systems running on Oracle’s Database even before the acquisition, it will be convenient for Oracle to shift Cerner’s current database to its next generation cloud infrastructure (Gen2 Cloud), ultimately providing a more autonomous and secure method of storing data. This deal proves to be accretive towards Oracle’s earnings with expectations of Cerner bringing in additional revenue growth for Oracle in years to come.
“Working together, Cerner and Oracle have the capacity to transform healthcare delivery by providing medical professionals with better information—enabling them to make better treatment decisions resulting in better patient outcomes.”- Larry Ellison, Chairman and Chief Technology Officer (Oracle)
Company Details (Acquirer - Oracle)
Oracle is one of the largest software companies in the world by market capitalisation and revenue. It is best known for its flagship database management solution and has been the market leader in the field since 1987. In recent years, the company has made significant investments into cloud technology and has expanded its offerings in platform services for application development, enterprise applications and Cloud at Customer solutions, among others.
Founded in 1977, headquartered in Austin, Texas, United States
CEO: Safra Ada Catz
Number of employees: 143,000
Market Cap: $239.4bn (as of 15/01/2023)
LTM Revenue: $46.1bn
LTM EBITDA: $17.9bn
LTM EV/Revenue: 7.0x
LTM EV/EBITDA: 18.1x
Company Details (Target - Cerner Corporation)
Cerner Corporation is a supplier of healthcare information technology solutions and tech-enabled services. It provides a computing framework and a cloud-based platform with clinical, financial, and management information systems, providing information for consumers, hospitals, and health systems. In addition, it offers tech-related services, and a portfolio of clinical and financial healthcare information technology solutions, as well as departmental and care coordination solutions.
Founded in 1979, headquartered in North Kansas City, Missouri, USA
CEO: David T. Feinberg
Number of employees: 28,000
Market Cap: $27.9bn (as of 17/01/2023)
LTM Revenue: $5.8bn
LTM EBITDA: $1.6bn
LTM EV/Revenue: 4.9x
LTM EV/EBITDA: 17.8x
Projections and Assumptions
Upon the deal announcement date in December 2021, although bridge loan debts of $15.7bn were taken to finance the acquisition alongside cash payments, the overall effect of the transaction was immediately accretive to the EPS of the combined company. However, the prospect of boosting Oracle’s leverage did prompt rating agencies, namely Fitch, to downgrade the rating of Oracle from BBB+ to BBB and even edging towards BBB- (a staggering contrast from Oracle’s high A rating as recently as 2020).
The cost synergy of the transaction is clear. Despite the general market downturn, the layoff announcement of around 10,000 non-customer-facing employees in 2022 – close to 50% of Cerner’s workforce - stands beyond market expectations and illustrates the determination of Oracle to accomplish its $1bn expense-saving goal. However, Oracle has not been making significant changes to Cerner’s top management team. Apart from appointing Dorian E. Daley and Brain S. Higgins as the new president and senior VP of Cerner, respectively, to monitor post-merger integration, Oracle will maintain Cerner’s management team, including its CEO David T. Feinberg, to continue the company’s management into the foreseeable future.
From a product perspective, the market-leading cloud database operation and data analytical development team at Oracle will integrate Cerner’s EHR (Electronic Health Record) systems to support more user-friendly interfaces and straightforward collaborative environments. At the same time, the military-level security capacity powered by Oracle could significantly help Cerner to win more valuable contracts from some of the largest institutions where the security of sensitive data is prioritised. In addition to assisting Cerner to sustain its leadership in the US market, the global salesforce and client base of Oracle would also serve as a great aid for Cerner’s expansion abroad.
Notably, the Oracle Cerner transaction could turn out to be beneficial for small competitors in the EHR vendor industry. As part of cost reduction efforts, Oracle would also consider terminating less profitable services for local hospitals and clinics to focus on servicing larger and more demanding hospitals. As a result, smaller EHR providers could see a jump in their sales after the Oracle-Cerner transaction.
Oracle’s acquisition of Cerner shows the ambition of the acquirer to strengthen its position in the medical sector, which is rapidly expanding. Not only does the healthcare industry in the US alone represent ~$17bn, but the market is rapidly expanding as new treatments become increasingly sophisticated and personalised. Prior to the acquisition, Oracle had already entered this segment with clients such as St. John’s Health and Children’s Minnesota, but Cerner will provide its acquirer with a more solid position in the field. This deal is actually inscribed in a tendency for tech actors to invest in healthcare, as shown by Microsoft’s acquisition of Nuance, a developer of conversational AI for healthcare.
Oracle’s acquisition of Cerner is also motivated by the prospect of portfolio synergies in the long run. On the one hand, Cerner, which started operating with an on-premise model and later moved to Amazon Web Services, currently stores high volumes of data. At the same time, Oracle is looking to expand its cloud storage capacity and wishes to attract new clients. Thus, this acquisition is the perfect opportunity for Oracle to move the datasets of Cerner to its own data centres and contribute to another line of business. On the other hand, the large datasets currently possessed by Cerner would also become available to Oracle (at least partly, due to doctor-patient confidentiality), meaning that the latter can also benefit from all possible usages of this source of information. For instance, the software company could extract insights through analysis or train AI algorithms.
All in all, Oracle’s acquisition of Cerner aims to benefit from the developments of both tech and biotech, meaning better-trained AIs and more value in healthcare.
Risks and Uncertainties
Adopting Cerner and Oracle’s technology is not without cost. For the last couple of years, the healthcare industry all around the world has been facing many hardships, mostly financial ones and doesn’t necessarily have the funds to invest in non-essential new technologies. Most of Cerner's clients are already using Oracle’s technologies, meaning that this acquisition will not necessarily allow Oracle to gain new clients. It is therefore uncertain whether this acquisition will indeed allow the company to boost its sales in this sector.
This deal will also raise significant cybersecurity related issues. Since all of the data collected by Cerner technologies will tend to be stored in the cloud developed by Oracle, it will make the potential fallout from cyber attacks more grave, as ‘all eggs are placed in one basket’. This could turn out to be a huge turnoff for potential customers, since health related data is very sensitive and could lead to major crises if it were to be leaked or the system to be temporarily blocked.
In addition, even though digital health has been thriving lately, there is still very little regulation when it comes to the type of technology that these companies are looking to implement. It is therefore difficult to forecast how this sector will develop, especially since many countries and organisations are seeking to be independent in key sectors such as data storage and healthcare or implement harsher regulation to protect personal privacy. As a result, it could be difficult for Oracle to expand in the global market in the long run.
“Joining Oracle as a dedicated Industry Business Unit provides an unprecedented opportunity to accelerate our work modernising electronic health records (EHR), improving the caregiver experience, and enabling more connected, high-quality, and efficient patient care. We are also very excited that Oracle is committed to maintaining and growing our community presence, including in the Kansas City area.” - David Feinberg, President, and Chief Executive Officer (Cerner Corporation)