I have written about Healtheon/WebMD (HLTH)
several times and even included it on my Top Ten List for 2000 (see
here “Net Stock Picks for the Millennium“). Every time I write about the
company, it seems to be a new company — as it constantly morphs itself into
the online health powerhouse.
Of course, the company has been on a buying binge. With a high market
capitalization, this is a wise strategy. Why pay cash when you can use
stock as currency?
Healtheon has several advantages. First of all, its online competitors have
relatively low market capitalizations. In other words, they do not have the
luxury to grow by acquisition.
Next, Healtheon’s brick-and-mortar competitors are, for the most part, slow
to react. They have been waiting patiently as Healtheon has been eating
their lunch. Traditionally, the healthcare industry has been very
conservative and not amenable to partnerships. In fact, when there is an
acquisition, it is typically a hostile one (case in point was the fight of
Pfizer for Warner-Lambert).
Interestingly enough, the low valuations of Healtheon’s competitors is a
great opportunity. That is, Healtheon can build its empire on the cheap.
An example is Healtheon’s purchase of OnHealth Network. The price was $264
million in stock — amounting to $83 per user. Basically, the purchase was
to get content, community and eyeballs — which can then be monetized with
e-commerce. By folding OnHealth into Healtheon, the plan is to make the
mega site the most trafficked online health destination for consumers.
This should not be difficult. According to Media Metrix, OnHealth is the
most trafficked health site (3.2 million unique visitors) and WebMD.com is
No. 3, with 1.7 million unique users. About 10 percent of the two sites have
duplicate members.
The front-end can then be hooked into Healtheon’s back-end, which will be
an online transaction system that ties patients, doctors, and payers. The
Healtheon back-end is the result of acquisitions. There was the purchase of
Medical Manager (MMGR) and its subsidiary, CareInsite (CARI) for $5.2
billion. Medical Manager reaches 185,000 physicians, whereas CareInsite has
deep penetration with payers. Another key acquisition was for Envoy for
$2.5 billion. The company has an extensive EDI (electronic data interface)
system that will allow Healtheon to process about 2 billion transactions
per year.
Conclusion
An aggressive acquisition’s strategy is a double-edged sword. A big obstacle
is integration. There are different cultures; there are different inform
ation systems; there are different market segments. Healtheon’s challenge
is to make everything sync.
So, yes, there is still lots of risk with the investment. Then again, if
the company is able to integrate the acquisitions, the upside can be
tremendous, as the company becomes the dominant online player of a trillion
dollar industry. Maybe that’s why lots of smart money is flowing into the
company, such as the recent $930 million investment from Janus Capital
Corp, a firm that knows how to pick long-term winners.
