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Oracle Acquires Cerner

Updated: Oct 30, 2023



Acquisition Overview


Software giant Oracle Corp. has confirmed that it will acquire Cerner Corp. for $28.3 billion through an all-cash tender. The deal, which is Oracle’s biggest acquisition ever, is expected to close in the calendar year 2022. By buying into one of the largest and fastest-growing vertical industries, Oracle hopes to spur a new era of digitisation within the healthcare industry and expand its cloud services provision. The strategic rationale for the acquisition includes the revenue potential from Cerner, the room for innovation within the healthcare industry, and the opportunity to expand Oracle’s cloud market share. The deal is also part of a larger trend of increasing financial activity taking place at the intersection of healthcare and technology.


Deal Structure


The $28.3 billion all-cash tender offer by Oracle means that Cerner shareholders will receive $95 per share held, representing a premium of 5.8% to the company’s last closing price before the announcement of the deal. Despite Oracle reporting $23 billion in cash at the end of the last quarter, they confirmed that they will not have to go into debt to finance the deal. The transaction is expected to close in 2022, subject to the deal receiving the appropriate regulatory approvals and satisfying other closing conditions, including Cerner stockholders tendering a majority of Cerner’s outstanding shares in the tender offer. After the transaction, Cerner will be organised as an ‘Industry Business Unit’ within Oracle.


Centerview Partners and Goldman Sachs acted as financial advisors to Cerner, while Oracle was advised by Hogan Lovells.


Oracle Overview


Oracle Corporation, founded in 1977, is American multinational software company headquartered in California. It specialises in database management systems and enterprise resource planning (ERP) software, but covers a wide range of industries including but not limited to Financial Services, Utilities, Pharmaceuticals, Hospitality and Government. In 2020, Oracle was the second-largest software company in the world by revenue and market capitalisation. The firm has a history of large-scale acquisitions, and since 2005, Oracle has spent at least $1 billion on an acquisition in 15 deals, with 7 of those deals being over $5 billion.


Cerner Overview


Cerner Corporation develops software and IT systems for the clinical and operation areas of hospitals. The company, based in North Kansas City, Missouri, employs roughly 26,000 people, and its revenue was $5.5 billion in 2020. The company’s services are used by both public and private healthcare providers across the world: for example, the Department of Veterans Affairs and Department of Defence use Cerner’s electronic healthcare record (EHR) technology. While most modern subscription software businesses are high-growth, Cerner lags somewhat; its annual growth rate has not reached double digits since 2015, and while the pandemic energised the healthcare sector, Cerner’s sales shrank in 2020. Despite its slow growth, Cerner still expects to generate $1 billion in net income by the end of 2021


Industry Insight


Healthcare has emerged as a battleground for tech companies as the industry is increasingly seen as a lucrative opportunity for expansion. This is for two major reasons. Firstly, the size of the industry - U.S. healthcare spending accounts for nearly 20% of the country’s gross domestic product. The sheer size of the industry provides an incentive to transition into it, as the returns from tapping into the market successfully could be highly profitable.


Further, the healthcare industry has often been slow to adopt the latest digital tools. However, the onslaught of the pandemic has spurred innovation within the industry to increase the efficiency and efficacy of current healthcare systems. In particular, the confluence of artificial intelligence (AI) and data analytics provides an opportunity to spur better healthcare outcomes. The proliferation in the amount of data available to companies has increased exponentially over the last decade. Combining this data with AI and machine learning capabilities means there is space within the industry to develop a growingly accurate picture of when and where intervention may be required. To store and manipulate this data, healthcare companies are increasingly looking towards the major cloud service providers. Companies such as Oracle, Amazon Web Services (AWS), and Microsoft see the huge healthcare market as a path to strengthening their positions in the cloud business, in which customers tap into remote data centres and typically pay on a pay-for-use basis.


Indeed, this year Microsoft acquired Nuance, a leader in the voice-recognition software used in hospitals, for $19.7 billion. Meanwhile, AWS has picked up numerous contracts from the UK’s National Health Service. This activity is indicative of the desire within the biggest software companies to forge deeper connections in the fast-growing healthcare industry.


Strategic Rationale


There are three key factors driving this deal.


Firstly, there is considerable room for innovation within the industry. Indeed, according to a recent study by the Mayo Clinic, physicians spend 1 to 2 hours on electronic health records (EHR) and desk work for every hour spent in face-to-face contact with patients, as well as an additional 1 to 2 hours of personal time on EHR related activities. By making Oracle’s hands-free Voice Digital Assistant a primary component of Cerner’s clinical systems there is room to significantly reduce time spent on EHR administration. Further, combining Cerner’s volume of data with Oracle’s cloud-based machine-learning tools and predictive analytics provides a platform for the creation of algorithmic systems that predict the likelihood a patient will contract certain illnesses


This point leads to the second driving force behind the deal: Oracle and Cerner’s complementary businesses. EHRs are already widely used in the industry – the next frontier lies in leveraging the data that comes from these systems to improve healthcare outcomes. Oracle, with its experiences in software production and life sciences, is well situated to guide Cerner to this goal. Indeed, the transition to Oracle’s software can be done extremely quickly because Cerner’s largest business and most important clinical system already runs on the Oracle Database.


Finally, from Oracle’s perspective there lies a promising revenue gain from Cerner’s services, as well as potential for much-needed increases in cloud market share. Oracle’s growth over the last few years has been slow and in fiscal 2021, revenues rose a mere 3.6% - lacklustre relative to the rest of the tech industry. Cerner presents an opportunity to change laggard revenue growth, and Oracle themselves said the acquisition will be “immediately accretive to the company’s earnings on a non – GAAP (Generally Accepted Accounting Principles) basis in the first full fiscal year after closing”. Meanwhile Oracle is far behind in terms of cloud market share, with AWS dominating the global market share in 2020 with 46.5%, while Microsoft held 14% and Google 4.8%. Oracle’s share however was a mere 0.5%. Not only does this deal shift some business away from AWS (as Cerner currently uses their cloud services), but also could help bolster Oracle’s cloud services business by bringing current and future healthcare workload to it.


Long -Term Prospects


This deal helps cement Oracle into the fast-growing intersection between healthcare and technology, while for Cerner it provides an opportunity to expand into markets in a way not be possible before. As Cerner is one of the largest providers of EHRs to the US healthcare market and a leading supplier to the NHS, Oracle will hope to use Cerner as an anchor asset to expand into healthcare and gain ground in cloud computing. However, with competitors making similar expansions, and Oracle’s small share in the cloud services market, it may be difficult for Oracle to fully utilise and leverage Cerner’s capabilities to make significant strides in the healthcare and cloud services industry.


Written by Kunal Barman.

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