Computer Sciences Corp has agreed to acquire First Consulting Group, a healthcare services company, for some $365m in cash. The deal is surely welcome news at FCG, which, despite a somewhat promising last quarter, hasn’t been able to break out of its recent sluggish performance.
FCG provides a range of outsourcing and consulting services to the healthcare and life sciences sectors. About 90% of its sales come from the US. FCG posted revenue of $264.1m last year, and for the first half of 2007, the company has reported $134.2m in sales. It did beat out analyst expectation in Q2 2007, but the revenue outlook for Q3 was only $66m to $68m, and net profits, down from last year, are expected to stay at their current quarterly level, somewhere above $3m.
FCG did unload its loss-making clinical software business, FirstGateways, to MedPlus in September. And there’s been some talk of a renewed pipeline that could help get the company back on a growth track. The company hired CEO Larry Ferguson last year after its previous head, Luther Nussbaum, stepped down in 2005.
The company also initiated a series of cost-cutting measure and retooled its sales force. So far these measures haven’t boosted FCG’s financials, but there’s still hope that they can improve profits and start landing contracts in today’s climate of increasing health spending in the US. The company has some slack to pick up from the loss of its large outsourcing deal with the University of Pennsylvania Health System, which contributed some $26.7m in sales last year. UPHS decided not to renew the contract earlier this year when it was up for renewal.
Instead UPHS took a lot of the outsourced applications work back in-house, and contracted out the infrastructure component to none other than CSC, in a five-year, $67m deal. CSC is clearly no stranger to the healthcare market, where it’s handled plenty of large-scale integration projects and worked with both the payer and provider sides. It recently took over several billions of dollars worth of work for the UK National Health Services’s IT program from Accenture.
With the acquisition of FCG, CSC will add the company’s 2,500 employees to its healthcare business. This includes FCG’s 600 or so employees in Bangalore and 580 employees in Ho Chi Minh City, a considerable offshore component.
CSC is shelling out $13.00 per share for FCG, a 30% premium on its closing price of $9.98 on Tuesday. The announcement sent shares up more than 27% to close at $12.69 yesterday. Share premium aside, the deal is extremely high given FCG’s revenue. Typically services firms are bought at a price slightly higher than their annual sales level, but $365m for FCG, whose revenue is stagnant at $268m and whose profits have shrunk and are stabilizing at best, is a hefty consideration.
The deal is expected to close in the first quarter of 2008, pending FCG shareholder approval. CSC said it should be neutral to earnings but add to cash flow in the first 12 months.