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Sunday, February 18, 2007

Some Gratuitous Advice for IBA Health Ltd regarding iSoft

In the last few days it has become an item of news in the UK financial press that the Australian E-Health Provider IBA Health is considering a purchase of iSoft PLC – the very troubled and probably near to insolvent UK E-Health Vendor.

Ben Woodhead provides good Australian coverage from February 16, 2007 at the following URL:


Right up front I need to make it clear I am an IBA Health shareholder but am not an iSoft shareholder – and that having purchased these shares at, or near, their low point a few years back – these shares have been pretty good to me!

It is also reported that the purchase is to be on the basis of a share-swap and that the ongoing operational funding for iSoft will be borrowed by IBA. The reason for this approach is that the on-going funding requirements for iSoft operations are almost certainly more than IBA's cash flow can reasonably support.

Some background (of IBA) is important here – the iSoft story having been laid out a while ago on the blog. (See “How Did iSoft Get into So Much Trouble?” dated October 21, 2006.). The key points are these:

1. IBA is really quite a small company employing of the order of 400 people (June 2006) compared with the approximately 3000 employed by iSoft.

2. In the most current year the company is forecasting revenue of $A74-76 Million with a profit of between $A23-24 Million.

3. The company has been driving for rapid growth in China, Malaysia and Singapore as well as Australia and has only recently purchased a development centre (December, 2005) in Bangalore, India. It is hard to see that these investments can possibly be bedded down.

4. The current market capitalization of $A525 Million really overstates the company size – given market capitalization was roughly one third of that only 12 months ago.

In summary I see IBA as a small-medium company which has been growing quite quickly, has made some sensible purchases to support its growth and is now well positioned as Australia's most promising e-Health company. Also the Asian expansion strategy IBA has been pursuing has been looking increasingly successful and given time looks likely to be very rewarding indeed.

iSoft on the other had is a 'rotting hulk' that has failed to deliver its major promise “Lorenzo” – an integrated clinical software suite for hospitals – and which is drowning under the weight of supporting a range of previously acquired legacy systems.

I am sure that the rationale IBA is contemplating is a 'once in a lifetime' opportunity to gain access to a range of large markets at a very low price. This may be true but the problems that have brought iSoft to where it is today are not going to be magically resolved by the purchase.

I also understand IBA's frustration with its limited success in its home hospital market over the last few years which it probably sees it can remedy through the acquisition of iSoft in order to gain access to sites in NSW and Victoria.

All this does not seem to me to provide a good enough reason to make such a high risk and potentially company destroying move. I say this from the perspective of an E-health specialist who reviewed iSoft's 'foilware' Lorenzo a year or so ago and was not convinced then of the feasibility of their vision – let alone their obvious inability to execute against that vision.

In summary, I think going forward with this merger is a 'bet the company' move which has an alarmingly high risk of failure and which will – almost certainly – have a bad effect on my personal investment!

The sell off (6%-7%) in the value of IBA shares in the period since the plan was announced suggests I am not the only one who thinks this move may ruin a wonderful Australian Health IT fairytale.

Some bargains just need to be left on the shelf!


Disclaimer: The previous article is not offering any form of financial or other advice. Do what you think is right for you (Buy, Sell, Hold or Ignore) in the current situation and don’t blame me if you get it wrong!


Anonymous said...

[quote]..and which is drowning under the weight of supporting a range of previously acquired legacy systems.[/quote]

I beg to differ. iSoft's "legacy" (your term, not iSoft's) systems are fundamental to it's survival. These systems are proven technology and the support costs are extremely low compared to that of their new technology (as you would expect). The revenue they generate is funding the development of the new technology systems. Far from drowning under the weight of supporting these systems, iSoft is floating on their buoyancy.

Aus HIT Man said...

Thanks for the comment.

All I can say is if "iSoft is floating on their buoyancy" I am glad I have no personal financial stake in the company. They are relying on a collection of non-integrated, different core technology modules which need interfaces maintained as so on to stay afloat while promising a system which most suspect is a mirage.

Time will tell who is right in all this. I hope for all their employees I am wrong!