Private equity interest in Merge prompts breakup speculation

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Merge Healthcare will soon receive a takeover offer from one of the 5 private equity firms weighing up a bid, Reuters reports. And the deal could have consequences for its clinical software unit, with analysts speculating that a buyer might break up the business.

The takeover talk comes two months after Merge revealed that it had appointed a bank to assess a possible sale. At least 5 private equity firms are reportedly in the hunt, attracted by a valuation that has taken a battering so far this year. A private equity buyer would likely focus on the core healthcare business--which generates more than 85% of total sales--and could choose to break off the eClinical unit for sale to a rival.

"The clinical unit of Merge could see some interest from strategic or financial acquirers," Dougherty & Co. analyst Deepak Chaulagai told FierceBiotechIT. Merge has gained traction in eClinical since introducing its early-phase clinical trial software--adding 150 contracts--but it is a small, noncore part of the business. One possible scenario is a private equity firm buys all of Merge, then sells off the eClinical and health station units to focus on the core imaging business. 

RW Baird analyst Eric Coldwell also sees this as a distinct possibility, saying via email that "most private equity shops would look for areas to shave off infrastructure." The chances of Merge retaining the eClinical unit would increase if a health information technology (HIT) firm wins the takeover battle, though. "Many HIT companies are expanding their reach into clinical trials, and several are even partnered with CROs. They might see a natural fit," Coldwell said.

Whoever buys Merge will have to turn around a struggling business. Shares are down by around one-third since the start of 2012, with a big fall coming in May when Merge withdrew its sales and earnings forecasts for the year. The withdrawal was a consequence of the move to a subscription-based sales model, slow uptake of which prompted Chaulagai to downgrade his rating. And the uncertainty could limit the price a buyer is willing to pay.

"We always get stuck with valuation and the kind of multiple private equity would pay for Merge's business given the lackluster growth," Chaulagai said. Avista Capital Partners; Thoma Bravo; GTCR; Welsh, Carson, Anderson & Stowe; and Francisco Partners are reportedly among the private equity players now assessing how much Merge is worth to them.

- here's Reuters' article