Cognizant buys TriZetto

New Jersey-based Cognizant, which has nearly a third of its workforce in India, surprised markets with the acquisition of TriZetto, a healthcare IT software and solutions provider , for $2.7 billion ( Rs.16,400 crore) in an all-cash deal.It's the biggest acquisition in the Indian IT space, topping iGate's $1.2-billion buyout of Patni Computer .
This is a very strategic acquisition for Cognizant as it gives the company the ability to work with its healthcare clients (who currently generate approximately $2.5 billion in annual revenue) to build the winning business models of to morrow as they grapple with new regulations, shifting demographics, new digital technologies and a changing industry landscape.
Cognizant is facing investor backlash ever since it cut its revenue growth forecast for the year to at least 14% from earlier 16.5%, slowest ever in its 20 year history . Investors have questioned the company's cash pile of more than $4 billion.
Monday's acquisition will see Cognizant borrow for the first time ever. Cognizant intends to finance the transaction through a combination of cash on hand and debt, and has secured $1 billion of committed financing in support of the transaction. The transaction is expected to close in the fourth the fourth quarter of 2014.
“Healthcare is undergoing structural shifts due to reform, cost pressure and shifting responsibilities between payers and providers. This creates a significant growth opportunity , which TriZetto will help us capture,“ said Francisco D'Souza, CEO of Cognizant.
The combination of TriZetto and Cognizant's healthcare practice creates a $3 billion-plus fully-integrated technology and operation leader in the healthcare market. About half the US population's health benefits are managed on the TriZetto software platform and about a quarter of the US providers (hospitals and clinics) also use TriZetto systems.
Cognizant expects to create $1.5 billion of cumulative revenue synergies over the next five years. The acquisition will be immediately accretive on a non-GAAP basis.
Cognizant has had a long relationship with TriZetto and its solutions. It is very familiar with the company , its people and its culture. TriZetto's revenue for the 12 months ended June 30, 2014 was around $711 million. Their non-GAAP operating margin for the period was 18.4%.
The industry has long been talking about TriZetto's revenue base, intellectual property , and software platforms. Its current revenue base is highly-predictable and non-linear . About two-thirds of TriZetto's revenue is recurring. About 40% of TriZetto's revenues come from health insurance software and 20% from software-as-a service (SAAS) model. This has led to a comprehensive portfolio of offerings to approximately 350 payers and approximately 245,000 providers.Founded in 1997, TriZetto was taken private in 2008 by Apax Partners for $1.4 billion. TriZetto has 3,700 employees (annual revenues per employee of $182,703 against Cognizant's $51,800), serving over 200 clients, including 16 of the top 20 US health plans.