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Readers Write: The Consultant and the Investor Look at Cerner’s Acquisition of Siemens

September 24, 2014 Readers Write 2 Comments

The Consultant and the Investor Look at Cerner’s Acquisition of Siemens
By Lynn Vogel, PhD


The publication of the recent HIStalk interview with Marc Grossman and a post by Ben Rooks offer a rare opportunity to learn about the different perspectives of consultants and investors using the Cerner acquisition of Siemens as a case study.

Full disclosure: I’ve known Marc (the Consultant) for close to 20 years and I consider him to be one of the top HIT consultants in the business today. I don’t know Ben (the Investor) personally, but was so impressed with his discussion of the MModal acquisition several months ago that I started an email exchange and have deep respect for his understanding of the financial aspects of HIT.

But the perspectives of the Consultant and the Investor couldn’t be more different. Here are some noteworthy excerpts from the Marc Grossman interview and from Ben Rooks’ recent “From the Investors Chair.”

From the Consultant

  • A lot of it’s going to depend on where the Siemens client is.
  • I believe Cerner is buying Siemens for intellectual property. On the patient accounting side, I think they’re also looking at the RCO base that Siemens has, which is a great revenue stream for them.
  • Given Cerner’s history and the industry’s history over the last 20-30 years, Siemens Soarian and Invision product support is going to go downhill.
  • I think they probably won’t sunset it officially for at least 10 years, just because I know Siemens does have numerous contracts which are going out 10 years.
  • Like we’ve seen with many other vendors that purchased other systems, Cerner is clearly not going to put R&D money into two patient accounting systems and two clinical systems if they have an integrated system now.
  • I just don’t see any indication that Cerner is going to continue the development of any of the Soarian or Invision products.

From the Investor

  • Cerner is now the clear sector leader and will enjoy mammoth cross-selling opportunities given the product fit.
  • This was a good use of both the cash hoard Cerner had built up on its balance sheet and its high-multiple stock, allowing the deal to be almost instantly accretive – especially with the $175 million in pre-tax synergies the company guided to in its press release.
  • Cerner’s shares are up almost 10 percent as I’m writing this post, more than twice the S&P — Ms. Market seems to be more excited.
  • The vast majority of analyst commentary has been positive and we here at the Chair are fans of the purchase as well.
  • The only thing that gives me pause as a long time Cerner watcher (and fan) is that the company has zero history of large-scale M&A and the sector has not been kind to such large-scale bets in the past.
  • What’s especially noteworthy here though is that the cultures of the two companies are literally more than an ocean apart
  • That said, the price Cerner paid clearly de-risks the acquisition, and Cerner is known for its strong culture

The Consultant starts with the impact on the client. How the customer base responds will depend on where they are currently with their HIT implementations. Will customer support for Invision and Soarian go downhill now? Will any level of customer support for Siemens’ products last beyond 10 years? Will there be any R&D for Siemens products going forward? Finally, the question about whether Cerner will “continue the development of any of the Soarian or Invision products?”

The Investor is looking at the Siemens acquisition from an almost purely financial perspective. Is this a good use of Cerner’s cash? What’s the impact on the stock price? What’s Cerner’s experience with large-scale acquisitions? How will the cultural challenges be addressed? In general, this looks like a “good deal.”

In some ways, the comparison of these two perspectives underscores one of the major challenges of HIT today. The investors are looking at the money, while the customers are looking for continued product development and ongoing support.

Unfortunately, the boards of most HIT companies are dominated by investors, with little input by those who understand either healthcare or information technology (Ben’s earlier analysis of the MModal situation is an excellent example). What’s missing, specifically?

  1. Looking under the covers. From an IT perspective, the Cerner acquisition of Siemens demonstrates again that acquisitions too often proceed without understand any of the underlying IT challenges. The code bases are different, the database architectures are different, the standards for code libraries are different, etc., etc. Recall the Allscripts acquisition of Eclipsys. A big selling point about this deal was that they were both based on Microsoft tools are architectures. We now know how that turned out. Siemens’ financial products are generally considered to be stronger than Cerner’s, but integrating disparate product suites is a challenge that has eluded almost every previous merger of HIT companies.
  2. Understanding how IT decisions are made by healthcare customers. Boards often have little understanding of the healthcare business and even less about how IT decisions are made in healthcare. It can be a long, slow, and often tortuous process (accelerated certainly by recent federal incentives) with lots of customer concern about long term support (note Marc’s observation that even lab systems typically last a decade or more). As a result, assumptions about how quickly financial returns can be generated are often way off the mark and the result is the demise of the acquired company.
  3. Leverage and financial returns dominate. Cerner is probably looking at the Siemens’ customer base almost as a captive audience, there for the picking and over time replacing their Siemens products with Cerner’s. We can only assume that Siemens reached the same conclusion about the SMS customer base at the time of that acquisition, and we know how that turned out. On the other hand, simply eliminating a competitor over time is a strategy that many companies both inside and outside healthcare have found to be successful. But taking Siemens out of the marketplace may also leave Epic is a much stronger position.

There are lots of discussions about whether the healthcare industry is really all that different from other industries. Even Drucker noted its extraordinary complexity. But when companies make decisions without a deep understanding—at the executive and board levels—about the technology, about what does make the healthcare industry unique, and worry more about the money than the customers (often not realizing that it in the end it is the customers who provide the revenue), we have a better understanding of why the HIT business is so challenging and probably filled more with company failures than successes.

I would argue that one of the solutions here is more Board level input from experienced HIT professionals. Across the industry, we see company boards with investors and occasionally clinicians, but virtually no HIT professional role.

Full disclosure: I was elected to the board of Glytec, an HIStalk sponsor, due to my specific HIT experience from inside the industry. During the course of my term, I have learned an enormous amount from the investors and the clinicians on the board and from the feedback I have received, it seems that my contributions as an experienced HIT professional have been valued as well.

There is an enormous amount of HIT expertise available that companies could use, but seldom do. This includes former (occasionally retired) CIOs, CIOs who are able to serve on boards while continuing full-time IT responsibilities, and consultants, particularly those who have experienced HIT from inside healthcare organizations, etc. Smart HIT companies would do well to take advantage of this talent to contribute to the success of their business.

Lynn Vogel, PhD is a principal with LH Vogel Consulting, serves on the board of Glytec, is a member of Next Wave Health Advisors, and serves as a senior advisor to Sophic Alliance.

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Currently there are "2 comments" on this Article:

  1. Great analysis Lynn and I agree with your perspective. However, companies that choose CIOs for their boards must proceed carefully. My experience is that most HC CIOs only develop a “cost center” perspective vs. a “balance sheet” perspective of business. I would suggest that savvy HIT consultants that have been successful building profitable firms would be better fits.

    In the case of the Cerner acquisition of Siemens, I would submit that a 3rd analaysis done by HIT Consulting CEOs would have been strongly against its possibility of success for Siemens. I can not recall one such deal that didn’t end up badly including and especially all the acquisitions of consulting companies (ACS – Superior, CSC – FCG, etc)

    The healthcare industry has a track record of being terrible at acquisitions yet Cerner couldn’t resist the fire sale of Suemens and was probably highly motivated to keep Epic from buying Siemens. I think historical customers of both Cerner and Siemens will suffer in the short term while Cerner is consumed developing integration strategies and in the long term as products are neglected long before they are sunsetted. That is how most of the previous deals have gone.

    Best regards and I hope that I wrong for all of my clients that are depending on Cerner to make 1+1> 2!

  2. As I noted earlier on this blog, financially this was a ‘slam-dunk’ for Cerner. Acquire a company doing about $1 bill/yr in recurring revenues, cut overhead (sales/mkt/admin, R&D, etc) so you easily generate 30% bottom line. In 4 yrs it’s paid for!
    In my 40 years experience as a CIO, HIT software entrepreneur, and consultant rarely does any HIT acquisition ever get more than 50% flips. Meanwhile Cern has direct access to the client CEO/CIO and even if you only get 50% of clients …that’s all gravy…lots of gravy…

    The sad part is all those clients that gave SMS and Siemens decades of time to get things right and SMS/Siemens. The promises kept coming, the results never did. Those clients had ample warning…over two decades, but kept believing things would get better and they never did. Smart ones jumped ship in the last decade.

    As Vince Ciotti has said, SMS was always a marketing company first, product company second. Then along comes Siemens – clearly a product /engineering company more than a marketing company, and even they could not straighten out the SMS mess.

    If I were a Siemens client today I would definitely start looking around. Not because Cerner is not a good product, but you really need to let Cerner know that you won’t be an easy or cheap ‘flip’ for them. Be ready to negotiate from a position of strength…Don’t wait for Cerner to make the first move, layout your strategy and start now.

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