Wednesday, March 10, 2010


Dalai's note:  This is another (master)piece by Mike Cannavo, the One and Only PACSMan, who kindly allowed me to cross-publish it on my blog, further evaluating the Merge purchase of AMICAS. 

There is nothing worse than being all dressed up with no place to go. That is how I felt when I stood by my phone waiting for it to ring with Morgan Stanley on the other line. “Tell us all you know Mike…” and I would share my years of knowledge with them. But alas, twas not to be. After all I am but a lowly PACS consultant with over 25+ years experience in this market while Morgan Stanley is a multi-billion dollar enterprise who knows it all…or so they think…And, hey, if the investment doesn’t work out, well there are always the Feds to help with a bail out as well. Spend my tax dollars well why don’t cha? The Dalai is also patiently waiting for Jason Dearborn’s call…or Michael Ferro’s or any of the others at Merrick Ventures who pull Merge’s puppet strings there too, but he too has heard nothing but Simon and Garfunkel’s Sounds of Silence…

Now before I go on please know that I love AMICAS as a company- its people, its product and its leadership. I also have a great deal of respect how Merge has managed to pull off this “deal” as well. But who is this deal right for- the investors, the companies and its employees, or the end users? As so many have said before, it’s ALL about the money so the answer is glaringly obvious.

Any time a company gets bought by another company in the same marketplace both companies tend to suffer. This is a historical fact. It usually takes 18-24 months before the market is confident enough in the “new” company to buy its products again, and in the interim sales tend to suffer the most. Both companies in this deal should know this all too well from experience with Merge’s purchase of e-Med several years back and AMICAS’ fairly recent purchase of Emageon. Dynamic Imaging also went through this identical scenario when they got scooped up by the folks at Generous Eclectics…and the list goes on and on.

Those end users looking to buy a PAC system are usually very hesitant to buy a product not knowing if the product will indeed live or die. In this situation there simply isn’t room in one company for two competing products. In both the Merge and AMICAS prior deals one product lived and one product died even though the company’s posture might be to say that the best features of both products were consolidated into a single product. Trust me here on this one- one lived, one died.

This isn’t unique to healthcare by any means. Just look at the automobile industry if you doubt this is true. In US Congressional hearings on December 2, 2008, General Motors announced its intentions to focus on four core brands (Chevrolet, Cadillac, Buick, GMC)), with the sale, consolidation, or closure of Saturn and the remaining brands ( Pontiac, Hummer and Saab). General Motors Chairman and former CEO Rick Wagoner announced during a news conference on February 17, 2009 that Saturn will remain in operation through the end of the planned lifecycle for all Saturn products (2010–11). Then General Motors announced in June 2009 that it was selling the brand to Penske Auto Group. On September 30, 2009, Penske terminated its discussions with GM to acquire its Saturn subsidiary after the company's board rejected plans to take over production of the Saturn line. This left GM with no alternative but to shut down the division and close dealerships by October 2010. So much for the “planned lifecycle”. And so much too for Saturn sales. They can’t give them away…

The same thing happened with GM’s Hummer Division. In June 2009 GM announced the sale of the division to the Chinese. By February 2010 the deal was pulled off the table, ostensibly because the automobile “wouldn’t be in line with Beijing’s aim to promote greener cars.” Um…didn’t they know back in June 2009 that the Hummer was no Prius? Someone’s getting a Hummer here, but it sure isn’t me…

Now let’s look at Merge and AMICAS company's revenues (or lack thereof). In FY ’09 Merge had a net income of just $300K on $66.8M in sales. While they could come back and say their adjusted net income was $11.5M I don’t buy non-GAAP adjusted measurements and frankly given Merge’s history with “adjustments” I am a bit hesitant to look at anything but the bottom line. In 2008 the company had a $23.8M net loss ($8.2M “adjusted” loss) on $56.7M in sales. So doing basic math over the past two years Merge has made $123.5M in sales and managed to lose $25.5M in the process. Even if I were to give them the benefit of the doubt and use their adjusted positive net cash number they made a mere $3.3M or a 2.7% net margin…Certainly sounds like a $200M loan candidate to me..

AMICAS was supposed to present its year end financial report February 18, but this keeps getting pushed back, no doubt because of all the scenario related to its pending purchase. The latest financials from 2008 show AMICAS lost over $30M on sales of just over $50M so they aren’t exactly setting the world on fire either. What is even worse is that over 79% of their revenue comes from maintenance and services and just under 21% from software sales. In a comparison of the five year cumulative return as found in AMICAS 10-K filing $100.00 invested in the NASDAQ would show a return of $80.47, the same $100.00 returning $95.44 for the Russell 2000 index while AMICAS would have returned a whopping $37.78. Yessirree sign me up today!!!

So here you have two companies who are hemorrhaging money hand over fist joining forces and no one knows what products from each company will live or die. And no customer- at least no customer in his or her right mind- will buy from either company until they are sure the product they choose is indeed the one that lives and doesn’t die, despite reassurances by both companies to the contrary. Let’s face it- greed is good- and it’s all about the almighty dollar here. Both companies also can’t sustain dual ongoing research and development costs, dual sales forces and management teams, offices in two geographically diverse locations, etc. As soon as AMICAS bought Emageon the reality of consolidation hit the people at Emageon hard and heavy. I would venture to say the same will hold true here with AMICAS unless, and this is a very real possibility, that Merge already has a buyer lined up for some or all of AMICAS’ offerings. I would tend to say this is more than a distinct possibility, but then what do I know…

The Merge people aren’t stupid- they are money men, plain and simple, and this play is all about the bucks. If Merge says we are going to use the AMICAS PACS instead of the Fusion and e-Film solutions solution what does that say about Merge’s PACS offering? Hey, we offered you a lousy solution before but we’re making it up to you by buying you a better one? Or if Merge Fusion and e-film solutions become the PACS solutions of choice from Merge what does that tell the AMICAS end users- we win, you lose- just deal with it? Ugh. This gives new meaning to ugly. This also just what the economy needs- more people out of work- and just what I need too- more out of work sales reps playing PACS consultant until they can find a real job.

This is why I liked the Bravo solution. It got AMICAS out of the public eye, gave them a few years to streamline the operation without having to worry about the bottom line, and then allowed them to come back a lean mean fighting machine with even more solid products than they have currently. They have a great product, a solid team and solid offering in the markets they serve- each of them- but just needed some help behind the scenes which the Bravo money would have provided. The Merge play, by comparison, is ALL about money. If I was an AMICAS stockholder I would be pi$$ed that the decisions to accept the Merge offer was made without my input. This is especially disturbing since the initial stockholders meeting was supposed to be on March 4th and got pushed back till the 19th, yet the decision to accept the offer was made by the AMICAS Board of Directors on March 8th. Of course all the smart money in AMICAS got out while the getting was good and stock was in the high 5’s low 6’s so… he who hesitates is lost.

Merge is also starting out behind the eight ball financially. In addition to leveraging itself beyond belief. AMICAS paid Project Alta Holdings Corp., ("Parent") and Project Alta Merger Corp., an affiliate of Thoma Bravo, LLC, a termination fee of $8.6 million, half of which was reimbursed by Merge. So that’s $4.3M per company in debt right out of the chute. Add to that 12-18 months of significantly reduced revenue that is quite inevitable, the interest on the bridge loan that one sourced pegged at $6.5M per quarter, and other challenges of a similar ilk and you seem to have anything but a blueprint for success. But we can hope. And I do.

Will they both survive? I hope so. Am I an optimist? Hopes springs eternal here but he realist in me says otherwise…after all in more 25 years of being in this industry I have witnessed this scenario time and again haven’t seen differently..... but there is always the first time…

In February 2010, as a means of customer retention, GM announced it was offering existing Saturn owners up to US $2,000 in incentives on purchasing a new Chevrolet, Cadillac, Buick or GMC vehicle until March 31. Customers are required to have owned their Saturns for at least six months and are not required to trade them in to be eligible for the incentives. Maybe Merge should do the same- offer an incentive to stay with the companies products until we know what will ultimately happen…

So there it is- since you asked (or didn’t). Judy Collins wrote and sang the song “Since You’ve Asked” although I much prefer the version that Tim Weisberg and Dan Fogelberg did on their Twin Sons of Different Mothers album in years past. The lyrics are hauntingly familiar:

Take the roads that I have walked along,

Looking for tomorrow’s time,

Peace of mind.

That is all everyone wants…peace of mind…And if we don’t find it soon we may be singing the lyrics to yet another Collins tune- Send in the Clowns.

Don't you love farce?

My fault, I fear.

I thought that you'd want what I want...

Sorry, my dear!


Anonymous said...

Dr. Dalai: they can't reasonably be expected to discuss this transaction until it's closed. Until the deal is done, nothing has actually happened. Once it's closed, I'm sure they will detail their plans.

Everyone agrees that competition in this sector is fierce, that margins have been compressed, and that reimbursement cuts are doing major damage. Players in this space must look for ways to rationalize, to create synergies, to explore cross-selling opportunities. This is all part of that inevitable process.

Anonymous said...

Agreed, but that's like voting for someone without knowing what their platform is. In this case the platform happens to be who will provide the biggest buck and whatever happens to either company, oh well, that's the was it is. In my book that's just not right.

Synergies? Looking at both companies and products there are few. Someone will live, someone will die and life will go on with one fewer company to deal with- until two new ones take their place hoping to capture their share of the American dream. It may indeed be the process, but IMHO the process sucks.


Anonymous said...

This video might give you an insight into Mr. Ferro, founder of Click Commerce:

His Merrick Ventures investors/board members are some very heavy hitters: