Bloomberg News

Allscripts Sale Talks Follow Shareholder, Board Battles

October 01, 2012

Allscripts Healthcare Solutions Inc. (MDRX:US)’s decision to explore a sale was preceded by a board upheaval and shareholder lawsuit that questioned the leadership of the electronic medical-records company.

HealthCor Management LP, a $2 billion asset manager that invests in health and life-sciences companies, filed the lawsuit May 21, criticizing the firing of Allscripts Chairman Phil Pead and protesting the process for filling three seats vacated by directors who didn’t support Pead’s removal. Less than two weeks later, HealthCor withdrew its lawsuit after Allscripts agreed to nominate three independent directors to the board. On Sept. 27, the company lost a bid for a $302 million contract in New York City’s public hospitals.

Now Chicago-based Allscripts has hired Citigroup Inc. to advise the company in talks with private equity buyers, people familiar with the matter said last week. HealthCor and the new board members probably are driving exploration of a sale, said Bret Jones, an analyst with Oppenheimer & Co. in New York.

“You’ve got a large shareholder, the number two shareholder, that’s clearly pushing for change,” Jones said in a telephone interview. “Selling the company would be one way for them to exit the position.”

Allscripts, the worst performer in the Standard and Poor’s Midcap Health Care Index this year, climbed 14 percent Sept. 28 after Bloomberg News reported the possibility of a sale. It rose 3.4 percent today to $12.84. HealthCor held (MDRX:US) 7.4 percent of shares outstanding on June 30, and Allscripts is the firm’s third-biggest holding, according to data compiled by Bloomberg.

HealthCor General Counsel John Coghlin, didn’t return a telephone message today seeking comment about Allscripts’ future. The firm’s two co-founders, Joe Healey and Arthur Cohen, didn’t return phone messages and e-mails sent Sept. 28.

Eclipsys Deal

Some of the company’s challenges can be traced to its acquisition of Eclipsys Corp. in 2010. Allscripts, which specialized in information systems for doctors’ offices, bought Eclipsys to expand into software for hospitals and health-care networks. The combination promised to be lucrative as a 2009 U.S. economic stimulus plan allotted $27.4 billion to help health-care providers buy and maintain electronic systems to collect and share medical records.

Instead, Allscripts in April said customers had “delayed commitments as they wait for us to introduce new releases and demonstrate more robust integration” of Eclipsys. At least 11 analysts in the past two months have cut their forecasts for full-year operating profit and the projections for sales growth (MDRX:US) would be the slowest since Allscripts went public in 1999.

Hospital Contract

The New York City Health and Hospitals Corporation board voted Sept. 27 to authorize the agency to negotiate a contract worth as much as $302 million with closely held Epic Systems Corp. of Verona, Wisconsin. The company will install its electronic records system in the New York system’s 11 hospitals, four long-term care centers and more than 70 community clinics. Allscripts, the losing finalist for the contract, has protested the decision, said Ian Michaels, a spokesman for the Health and Hospitals Corporation.

“Epic is the preferred vendor,” he said in a phone interview, and the agency believes Allscripts’ protest “is without merit.”

Contract Fallout

The New York loss may have increased pressure to take the company private, said Leo Carpio, an analyst with Caris & Co. in New York. Allscripts serves many of New York’s private hospitals, including New York-Presbyterian, Montefiore Medical Center and the Mount Sinai Medical Center, he said in a telephone interview.

“Now you’ve got Epic Systems winning a major contract here,” Carpio said. “It shows that competition is tough. I’m thinking it’s that that drove them to go private -- that they need to do a lot of changes to their organization without facing the scrutiny of being a public company.”

Eric Coldwell, an analyst at Robert W. Baird & Co. in Chicago, agreed.

“Accelerating investments and realignment initiatives behind the scenes would not be an unwise consideration,” Coldwell said in a Sept. 28 note to clients. “Being privately held might actually be a competitive advantage at this point.”

Ariana Nikitas, a spokeswoman for Allscripts, said in an e- mail today that HealthCor’s lawsuit “was withdrawn and the matter resolved.” She said Allscripts wouldn’t comment on “rumors or speculation” about its sale, and that the contract process for New York City’s hospitals “has not concluded.”

Shares Decline

Allscripts shares (MDRX:US) had tumbled almost 9 percent from the day it completed the Eclipsys acquisition in August 2010 through April 25, 2012, the day before the company revealed a board dispute that resulted in the firing of its chairman and the departure of three directors. The shares tumbled 36 percent the day after that announcement and have yet to recover.

Pead and the two of the three directors who left -- Eugene V. Fife and Edward A. Kangas -- had been board members of Eclipsys before the Allscripts acquisition. HealthCor said in its complaint that it had favored the acquisition “because of the counterbalance that Eclipsys management” would provide to Chief Executive Officer Glen Tullman.

Chief Financial Officer Bill Davis also left in May to take the same job with educational software company Blackboard Inc.

‘Meaningful Dialogue’

The day after Allscripts’ April 26 announcement of the board shakeup, HealthCor said it wrote the company’s management seeking an explanation and “meaningful dialogue about the company’s future.” Allscripts’ board responded by adopting a poison pill measure that effectively prevented new shareholders from obtaining 10 percent or more of the stock and freezing the ownership of existing shareholders already with more than 10 percent, according to HealthCor’s complaint.

Allscripts’ largest shareholder is Manning & Napier, an investment firm in Rochester, New York, that holds 9.3 percent of the shares outstanding (MDRX:US), according to data compiled by Bloomberg. A spokeswoman for Manning & Napier, Shannon Lappin, said in an e-mail on Sept. 28 that the firm wouldn’t comment on news that Allscripts sought a sale.

Allscripts refused to let HealthCor nominate a slate of directors after Pead’s departure, HealthCor said in its complaint. It filed its lawsuit on May 21, alleging Allscripts’ board had breached its fiduciary duty to shareholders.

HealthCor withdrew its lawsuit after Allscripts said June 1 that it would nominate three independent directors to the board: Stuart Bascomb, chairman and chief executive of closely held QualSight Inc. and a founder of pharmacy benefit manager Express Scripts Holding Co.; David Stevens, a former executive at Medco Health Solutions Inc., a pharmacy benefits manager acquired by Express Scripts this year; and Randy Thurman, an adviser and operating partner at New York-based New Mountain Capital.

Shareholders approved the slate later that month.

Stevens declined to comment through an assistant who wouldn’t identify herself. Bascomb and Thurman didn’t immediately respond to messages left with intermediaries.

To contact the reporter on this story: Alex Wayne in Washington at awayne3@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net


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