Cognizant’s TriZetto buyout: A Wake-up Call For The Rest
IT major Cognizant Technology Solutions’ recent acquisition of healthcare IT company TriZetto for $2.7 billion is expected to give it a strong foothold in the US IT healthcare market, where it competes with global giants such as IBM and Accenture.
Analysts believe at a time when healthcare companies across the US are reeling under cost and compliance pressure, Cognizant’s buyout of a healthcare specialist will drive up revenues from the vertical to $3 billion and give it access to over 200 clients, including 16 of the top 20 US health plans. Truly some analysts touted Cognizant as the “new Big Blue” seeing its accelerating pace of growth and ambition.
The Nasdaq-listed company currently generates close to 26 percent of its revenues at $8.84 billion from the healthcare and life sciences and it is now expected to touch $22.6 billion by 2017, further driven by opportunities from Obamacare policies.
Cognizant CEO Francisco D’Souza says that healthcare in the US is undergoing structural shifts due to reform, cost pressures and shifting responsibilities between payers and providers. “This creates a significant growth opportunity, which TriZetto will help us capture,” he said in a statement.
Most of Cognizant’s rivals TCS, Infosys, Wipro and HCL Technologies have a smaller presence in the healthcare and life science segment, which contributes around 6-10 percent in terms of revenues. Analysts believe some of these players have planned to foray into this segment in recent years but have shied away from striking anything big. But the TriZetto deal could change the paradigm and prompt some of them to chase big buyout deals, especially in healthcare.
Though the New Jersey-based company shocked investors with slower growth in the second quarters, which showed revenue increase of 16.5% to $2.52 billion from $2.16 billion a year ago, the lowest in its 20 years, analysts are optimistic about its long-term prospects. Currently, among Indian software services exporters, only TCS has managed to keep pace with Cognizant’s scorching growth rates over the past three-four years. Cognizant has always been consistent.
According to a Livemint report, the company still continues to be perched comfortably in comparison to other large peers such as Infosys and Wipro, who are struggling to match industry-level growth rates. Last month, Infosys’ new CEO Vishal Sikka also said that the company needs to regain consistency in revenue growth, an area every software services firm should emphasize on.
What worked in Cognizant’s favor
When compared to the other Indian IT majors, such as Infosys, Wipro and TCS, Cognizant has been a late entrant. And this is exactly what worked in the favor of the company making it more flexible and adaptable to the changing environment, mentioned Peter Schumacher, CEO, Value Leadership of the company in a report.
“When most of the established players were hesitant to move out of their comfort zones, Cognizant was in a position to take more risks. It created new business models that were more relevant and aligned with the market demands,” he wrote in his report.
The company has also invested inSMAC (social, mobile, analytics and cloud) technologies, catching up with the latest trends and business models. Coburn mentioned that it expects to hire over 10,000 professionals in the US alone by 2016. It now delivers this technology to 60% of its top 100 customers.
The IT major hasreshuffled its top management to give more powers to its second-line of leaders, a move which Coburn said would help the company “organize for the future in order to stay relevant to our clients.” [Read: Cognizant Reshuffles Top Management to Stay Relevant]
Likewise investment and acquisitions have helped the company surge ahead of its peers. As Cognizant president Gordon Coburn said at an analyst call, “Our reinvestment in our business continues to help us strengthen our capabilities to address our clients’ dual mandate of driving greater performance in their current businesses, while positioning them better for future success.”
While nearly 80% of its business is coming from North America and the rest from Europe, vertical-wise too, the company has managed to capture some of the fastest growing ones such as financial services which contributes to 41% of its revenue, followed by healthcare, which is yet again another fastest growing sector. The recent acquisition is certainly a step in that direction.
As a senior analyst with Avendus Capital told TOI, it’s a wake-up call for other Indian IT players and its leadership to gear up to a challenge from not only TCS, but also Cognizant that has at the right time made a strategic move in one of the most accelerating sectors.
Reportedly, the global healthcare IT services market is estimated at $28-30 billion and is expected to double to $56-60 billion by 2020.
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