Cognizant Technology Solutions Corp. (CTSH) is set to buy privately-held provider of health care information technology (IT) solutions, Trizetto for $2.7 billion in cash. The deal is expected to close in the fourth quarter of fiscal 2014 and will be accretive to Cognizant’s bottom-line immediately.
Privately-held Trizetto is engaged in the development of administrative software that connects health care bodies and insurance companies. Following the closure of the deal, 3700 employees of Trizetto are expected to join Cognizant.
This happens to be Cognizant’s largest acquisition to date. It expects to pay the aforesaid sum striking a favorable balance between cash and debt. Cognizant has already arranged for financing worth $1 billion for the acquisition. As of Jun 2014, the company had a cash balance of $4.1 billion with zero debt balance.
Per Cognizant, the deal will help it to realize revenue amounting $1.5 billion over the next five years. Currently, the combined entity generates more than $3 billion in revenues from the health care sector.
We believe that the acquisition will provide a significant boost to Cognizant’s top line going forward. It will help the company to cash in on the future prospects of the health care industry, which currently accounts for near about 17% of U.S. gross domestic product (GDP).
Further, we believe that Trizetto will be easier to integratesince both the companies have many healthcare clients in common. However, Cognizant has been exposed to severe criticism as many believe the deal to be overpriced.
We believe that Cognizant, which competes with the likes of Accenture (ACN), Infosys (INFY) and Wipro Ltd. (WIT), remains well diversified in key verticals and emerging markets of social, mobile, analytics and cloud, which will continue to boost its top line. Moreover, its expanded share buyback program reflects strong liquidity, which will further boost investor confidence in the near term.
Currently, Cognizant has a Zacks Rank #3 (Hold).
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