Time Capsule: Public Trading Leads to Trouble for Merge and Misys

I wrote weekly editorials for a boutique industry newsletter for several years, anxious for both audience and income. I learned a lot about coming up with ideas for the weekly grind, trying to be simultaneously opinionated and entertaining in a few hundred words, and not sleeping much because I was working all the time. They’re fun to read as a look back at what was important then (and often still important now).

I wrote this piece in July 2006.

Public Trading Leads to Trouble for Merge and Misys
By Mr. HIStalk

In this week’s Merge Healthcare saga, three top executives stepped down, the company’s previous financial reports and audits were declared unreliable, and Nasdaq de-listing appears imminent. Talk about your memorable holiday!

Merge’s nemesis was that least-exciting of corporate swashbucklers, the unseen accountant, whose pressured blessing of questionable bookkeeping practices ticked like a time bomb — buying desperate executives time to avoid the torch-waving mob of unhappy shareholders, but eventually blowing up in the faces of anyone unfortunate enough to be in the vicinity at the time.

Publicly-traded firms do everything they can, sometimes including cheating, to show a paper profit. Stock price trumps everything. The shareholder is the most important customer and they demand not just profit, but profit growth. Every quarter’s end is another spin of the Russian Roulette revolver.

Privately-held companies do the opposite. Profits mean paying taxes, so those are deferred as long as possible. Companies have little reason to juice the books unless they are borrowing money or trying to go public. Owner-operators are motivated by their long-term equity in the business, so what’s good for them is probably good for me as their customer. We’re both in for the long haul.

The Misys situation provides an interesting backdrop. The rash of activity seems to point to one outcome: Misys will likely cease to exist as a publicly-traded firm. Prospective purchasers, including the company’s current and prior management, see more value than the share price suggests, leading to talk of taking the company private. That won’t come cheap, so there’s a good chance that the healthcare division would be auctioned off to pay down some of the cost.

Neither Merge nor Misys would be in trouble if they weren’t publicly traded. The lure of shareholder cash came with an unpleasant ride on a merry-go-round that didn’t agree with them or their customers. In Misys’s case, they’re willing to pay to get off. They are disillusioned with the pot of gold that most privately-held companies secretly seek.

I’ve watched several of my vendors go public or be acquired by public companies over the years. I can’t think of a single example where my organization was better served afterward. Once the sexier siren of shareholders stole their attention, I saw a decline in support, development, and customer communication. A revolving door of soothing suits tried to explain the publicly-proclaimed synergies that somehow never seemed to benefit my organization. I went to bed with Company A for logical reasons, but then woke up startled to find an uninvited Company B beside me instead.

I don’t consider it to be good news when my vendor announces plans to go public or to be acquired. As a customer, my experience suggests that I won’t be thrilled with the result. In a perverse way, the only safe strategy might be to just go ahead and buy from the big publicly-traded vendor upfront, whose large warts are at least fully developed. In other words, for the same reasons people eat at McDonald’s – to accept plainly obvious mediocrity for fear of being disappointed otherwise.