Elliott Management Offers $7B Cash for Athenahealth

The private equity firm, which already owns a 9% stake in Athenahealth, says the takeover is needed to address strategic and operational failures, and an unwillingness by leadership to change course.  

Elliott Management has made a cash offer to buy the medical IT company Athenahealth Inc. for $160 per share and take it private in a deal valued at about $7 billion.

In an eight-page letter making the acquisition pitch to Athenahealth leadership, Elliott Partner Jesse Cohn said the Watertown, Massachusetts-based Athenahealth has a history of underperformance both strategically and operationally.   

"Unfortunately, we are faced now with the stark reality that Athenahealth as a public-company investment, despite all of its promise, has not worked for many years, is not working today and will not work in the future," Cohn wrote.

"Given Athenahealth's potential, this reality is deeply frustrating, but the fact remains that Athenahealth as a public company has not made the changes necessary to enable it to grow as it should and to create the kind of value its shareholders deserve."

Cohn's letter ticked off a list of grievances that include:

• Operating Effectiveness: Athenahealth has long been unable to drive any operating leverage. Despite maintaining a 30% long-term operating margin target for many years, margins for 2017 were just 14%, well below the company’s peers and still down from 2011 margins of 17%, when the company was one-quarter its current size and lacked the benefit of scale. Recently, the company took steps to improve margins to 16-17% for 2018 (based on guidance), but the company appears to be struggling with execution of this plan.
   
• Product Execution: Operating issues go well beyond efficiency, as Athenahealth's streamlined introduction was a significant and disappointing step backward that led to years of (Net Promotor Score) declines. Similar issues have plagued other Athenahealth offerings such as its inpatient solution and Epocrates.
   
• Strategy Execution: Athenahealth has a publicly described grand vision, but has repeatedly failed to execute. Inpatient is a prime example, where the company has been unable to deliver consistent quality of service in order to promote the adoption of a product that is otherwise disruptive.

• Forecasting: Despite years of promises, athenahealth does not achieve what it sets out to. The company repeatedly misses its targets: its long-held 30% operating margin target, 21% growth in 2017, $400–$450 million of bookings in 2017, 30% bookings growth in 2016, 100 hospital implementations in 2017, and many, many more examples.
   
• Guidance: Athenahealth's team has shown that it lacks visibility into its business performance. The Company has repeatedly set and failed to achieve its targets, including twice cutting (and yet still missing) its 2017 bookings guidance. The board, being forced to rely on these figures, cannot grade the business. Shareholders are left to suffer, with regular 10%–20% declines in the company's stock price on earnings announcements. Prior to the disclosure of Elliott’s position last year, athenahealth was by far the most heavily shorted U.S. company above $2 billion in the software, services and healthcare IT universe.

In a media release, Athenahealth acknowledged the buyout offer but said little else.

"Consistent with its fiduciary duties and following consultation with its independent financial and legal advisors, the Athenahealth board of directors will carefully review the proposal to determine the course of action that it believes is in the best interest of the company and Athenahealth shareholders. Athenahealth shareholders do not need to take any action at this time," the statement read.

According to CNBC, the proposal is a 27% premium to Athenahealth's share price. The shares jumped nearly 24% in trading on Monday after CNBC reported that Elliott was preparing to make the bid.

Athenahealth's CEO is Jonathan Bush, the cousin of former President George W. Bush.