Cognizant to pay $2.7B for TriZetto

But why is it buying a legacy platform?
By Bernie Monegain
01:51 PM
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Outsourcing company Cognizant, which provides healthcare technology services to providers and payers, will buy health IT software company TriZetto for $2.7 billion in cash. TriZetto provides similar healthcare IT services to the same market.

Cognizant executives confirmed the deal, which had been anticipated for weeks, in a Sept. 15 conference call. The agreement is subject to changes.

Reuters reported Aug. 19 that private equity firm Apax Partners, which, along with partners BlueCross BlueShield of Tennessee and Cambia Health Solutions, purchased TriZetto in 2008, were exploring a sale of TriZetto, "hoping to fetch as much as $3 billion, including debt."

Cognizant intends to finance the transaction through a combination of cash on hand and debt, and has secured $1 billion of committed financing in support of the transaction, which is expected to close in the fourth quarter.

"Healthcare is undergoing structural shifts due to reform, cost pressure and shifting responsibilities between payers and providers," Cognizant CEO Francisco D'Souza said in a press statement. "This creates a significant growth opportunity, which TriZetto will help us capture,"

D'Souza added that the combined portfolios across technology and operations would position Cognizant to better help clients drive higher levels of efficiency. He expects the acquisition will boost Cognizant's market position and strategy to better aid its clients, he said.

He noted that TriZetto brings to Cognizant new market opportunities, expertise and intellectual property, including:

• Multiple industry-leading software platforms used by payers and providers.

• Enhanced competitiveness in integrated engagement opportunities.

• Approximately $1.5 billion of potential revenue synergies cumulatively over the next five years.

• Attractive, non-linear software revenue.

The Cognizant-TriZetto deal left Joe Marabito, CEO of technology platform company ikaSystems, puzzled, though he sees the move as "a big deal."

"It's a lot of money to pay," Marabito told Healthcare IT News. "I think it just highlights the opportunity in our industry. To pay $2.7 billion just really emphasizes how much opportunity there is here. It's a very hot space. There's lots of activity. We have the biggest sales pipeline we've ever had."

Marabito added that the Cognizant-TriZetto deal reinforces a trend toward BPO – business process outsourcing – and platform purchases.

As he sees it, an increasing number of health plans and other organizations that bear risk not only want to replace their platform, but they also want to have somebody operate it – "all in a quest to reduce operating costs because there's so much pressure on the margins of health plans."

What intrigues him, though, is why TriZetto appealed to Cognizant.

"Most purchasers are moving away from legacy solutions," Marabito said. "And, or course Trizetto has legacy solutions."

"You really see in Cognizant's acquisition of TriZetto the marriage of a pretty big and very successful BPO vendor with a platform vendor," he added.

Marabito surmised that the acquisition was primarily based on the existing client footprint that TriZetto has. "They have a pretty broad swath of the market," he said.

"They've got a lot of customers that are currently under contract," he added. "I think that Cognizant is looking to leverage that customer footprint into additional business. I think the challenge they going to have with that is they're basing that springboard off of a legacy platform that they're going to have to find some way to compensate for or make some considerable investment in order to improve it."

Gartner analyst Robert Booz sees the acquisition as bringing clarity to TriZetto's future, yet not without challenges.

"TriZetto has invested heavily in strengthening its products and support services and improving customer satisfaction, but still has work to do to overcome negative perceptions of its service levels in its core lines of business," Booz writes in his analysis. "Cognizant will add implementation stability and consulting experience. However, integration will likely take at least six to 12 months, and we anticipate a significant degree of confusion – and at least a somewhat increased business risk to TriZetto customers – in the interim."

TriZetto and its 3,700 employees will become part of Cognizant's existing healthcare business, which currently serves more than 200 clients, including 16 health plans and four pharmacy benefit management companies.

Healthcare currently represents approximately 26 percent of Cognizant's revenue.

"TriZetto solutions enable the healthcare interactions of millions of people in the U.S. every day," said Jude Dieterman, president and COO of TriZetto, in a news release. "Our agreement with Cognizant advances our vision of simplifying healthcare for everyone.

Cognizant President Gordon Coburn sees the TriZetto acquisition as an opportunity to integrate services across Cognizant's three major offerings – traditional IT services; high-growth businesses such as management consulting, business process services and IT infrastructure services; and emerging delivery models.