McKesson shed its IT arm into a $3.4B JV to bet on drug distribution

In June 2016, McKesson announced it would combine most of its IT business, Technology Solutions, with revenue-cycle firm Change Healthcare to form a new health IT company: McKesson 70%, Change Healthcare 30%, with cash proceeds of about $1.25 billion and $1.75 billion respectively, an IPO planned, and more than $150 million in annual synergies expected by the second year after closing. The new company would have around $3.4 billion in pro forma annual revenue.

The unit was no star. Technology Solutions posted $2.9 billion in sales and $519 million in operating profit the prior fiscal year, but was never more than a mid-tier health IT player. Morningstar's Vishnu Lekraj called it an impaired asset from the outset because of accounting fraud in its early acquisition of HBO & Co. — the HBOC disaster that cost McKesson upwards of $1 billion in a shareholder suit — noting McKesson had made no material investment in it for years and the technology ran two to three generations behind rivals.

The divestiture fitted a broader sharpening of focus at the drug distribution giant, which had $188 billion in fiscal 2015 sales and $3.6 billion in operating profit: acquisitions of Vantage Oncology, Biologics and UDG Healthcare, a $2.2 billion agreement for Rexall Health, a March cut of 1,600 employees (4% of its US workforce), the sale of its ambulatory EHR assets to e-MDs, and strategic options under review for the remaining Enterprise Information Solutions division (Paragon, OneContent). Analysts cheered: Morningstar, Baird and Leerink Swann all rated the stock a buy.

About $1.25B cash plus 70% of a new company with $3.4B pro forma revenue and $150M+ expected annual synergies by year two; resources freed for distribution

The IT unit, born of the failed HBOC merger, never fit — impaired from the outset and generations behind competitors.

Distribution, the $188 billion core, faced pricing pressure and needed undivided resources.

The structure preserved upside: 70% of the new company plus roughly $1.25 billion in cash.

Divest the asset that distracts: a unit earning $519M can still be strategic dead weight when your core is under attack.

The transaction was slated to close with an IPO of the new company, while McKesson weighed strategic alternatives for Enterprise Information Solutions. Analyst reaction was favourable, with buy ratings from Morningstar, Baird (outperform, $220 target) and Leerink Swann ($200 target).