Buyout banter has cropped up about Irvine-based healthcare software maker Quality Systems Inc.
Quality disclosed in a Securities and Exchange Commission filing last month that its board transaction committee—which is expected to contain two director candidates backed by an activist shareholder—would “take prompt action to recommend to the board the hiring of a suitable investment banking firm or management consulting firm.”
The firm would be part of a strategic review that could include a possible sale.
Company founder and Chairman Sheldon Razin and Chief Executive Steven Plochocki declined interview requests last week.
Gene Mannheimer, a research analyst with B. Riley & Co., a Los Angeles-based investment bank with a Newport Beach office, said he could see a scenario in which Quality would be bought by a private equity firm in a bid to grow without the demands of a public company.
“I do think, relative to where the stock is trading, there’s some good value in the company,” Mannheimer said. I personally think that they are going to explore [a] going-private transaction.”
Shares of Quality, which makes software that doctors and dentists use to manage their practices, have risen 27% this year after a tough 2012, with a recent market value of about $1.4 billion.
The gain helped return founder Razin, who holds 17% of the company’s shares, to the Business Journal’s annual OC’s Wealthiest list, the centerpiece of this week’s issue.
Mannheimer said Quality still has a way to go. It posted a $4 million loss in the first quarter and likely wants to do its “heavy lifting”—such as integrating its smaller purchases, building up its hospital business and research and development—without the quarterly crunch of Wall Street.
He said he could also see a move to go private as a prelude to an eventual return to Wall Street with an initial public offering—or perhaps an eventual sale to a strategic buyer within a couple of years. Some potential buyers being mentioned lately: Minneapolis-based UnitedHealth Group Inc.; San Francisco-based McKesson Corp.; Siemens AG in Germany; and Round Rock, Texas-based Dell Inc.
UnitedHealth declined comment for this story. McKesson, Siemens and Dell couldn’t be reached.
Cerner Corp., a Kansas City-based healthcare software company and Quality competitor, is likely not a potential buyer, according to Mannheimer.
“They probably believe their product is just as good, and the redundancy wouldn’t necessarily be a good fit,” Mannheimer said.
Cerner also declined comment.
Quality could also look at making a “transformational acquisition” to get deeper hospital penetration but is more likely to sell itself, Mannheimer said.
Greg Bolan, a Nashville, Tenn.-based managing director with Birmingham, Ala.-based investment bank Sterne Agee, wrote that he’d been somewhat skeptical in the past of Razin’s willingness to sell Quality.
“In our mind, there is no question that Mr. Razin is a powerful voice on the board, and its members often follow his direction,” Bolan said. “In our view, what is clearly expressed within the (recent SEC filing) is that the board and of course Mr. Razin is open to a strategic evaluation of the company.”
The push for changes at Quality parallels the emergence of activist shareholder Clinton Group Inc. in New York.
Quality, as part of a deal it cut with Clinton Group, agreed to back three director candidates Clinton Group put forward for the company’s annual meeting, which is scheduled for Aug. 15.
Clinton Group, which owns about 1% of Quality, argued that Quality’s board isn’t a good fit for the company and that it lacks directors with real-world healthcare software company experience. Clinton Group contends that has kept Quality from taking advantage of opportunities presented by the 2009 federal stimulus package, which gave doctors and others financial incentives to automate.
Mannheimer also critiqued the board, noting that the company hit a wall in its high-end software growth, “and I don’t think they properly anticipated or prepared themselves to move downstream quickly enough with a cloud-based offering to attract the smaller physician practice,” he said.
Smaller practices offer better growth opportunities because they’ve not yet automated, he said.
Mannheimer said Quality likely struck a deal with Clinton Group because it didn’t want to endure another proxy fight—former director and 10% owner Ahmed Hussein mounted four proxy fights in nine years against Quality.
Hussein resigned from Quality’s board in May.
