Mumbai: Nasdaq-listed Cognizant Technology Solutions Corp. said on Monday that it had agreed to buy privately held TriZetto Corp. for $2.7 billion in cash, seeking to expand its already strong presence as a provider of information technology (IT) services to the US healthcare industry.

Cognizant, which traces its roots to Chennai and has most of its 187,400-strong workforce (as of 30 June) based out of India, said it intends to finance the purchase of Colarado-based TriZetto through a combination of cash on hand and debt.

The Teaneck, New Jersey-based company has secured $1 billion of committed financing in support of the transaction, it said in a statement, adding that it expects additional revenue and savings amounting to about $1.5 billion over the next five years.

Earlier this year, it announced a seven-year contract with California-based Health Net Inc. worth $2.7 billion in revenue.

“We anticipate that the TriZetto transaction will close in the fourth quarter (October-December 2014), subject to customary closing conditions. We also expect to close the Health Net deal, announced at the time of our June quarter earnings, during the same period. This will give us a dominant position in the US healthcare market," said Gordon Coburn, president of Cognizant. “TriZetto, when closed, will take Cognizant’s healthcare services revenue to approximately 30% of company revenue."

TriZetto says its services reach 245,000 healthcare providers, representing more than half of the insured population in the US. TriZetto’s revenue for the 12 months ended 30 June was approximately $711 million.

Private equity firm Apax Partners Llp bought TriZetto in 2008 for $1.4 billion and reported a 12-month revenue of $682 million to the end of March, according to a 19 August Thomson Reuters report citing Moody’s Investors Service Inc.

“Healthcare is undergoing structural shifts due to reform, cost pressure and shifting responsibilities between payers and providers. This creates a significant growth opportunity, which TriZetto will help us capture," said Francisco D’Souza, chief executive officer of Cognizant, in the statement on Monday.

The US healthcare services market is a lucrative one for IT services providers. A 28 January report by global research firm Gartner Inc. said spending by global healthcare providers on IT services will grow by 4.33% to reach $31.96 billion in 2014.

Nearly 26% of Cognizant’s $2.52 billion revenue in the June quarter came from healthcare services, the company’s second-largest source of revenue after banking, financial services and insurance, or BFSI, which accounted for 42.1% of its revenue in the same period.

Comparatively, India’s largest IT services provider Tata Consultancy Services Ltd (TCS) reported 6.3% of its June quarter revenue as coming from healthcare and life sciences, out of total revenue of 22,111 crore in the same period.

HCL Technologies Ltd reported 0.9% of its June quarter revenue of 8,424 crore from life sciences and healthcare. Wipro Ltd said 10.8% of its total June quarter revenue came from healthcare, life sciences and services. Its revenue for the quarter ended 30 June was 11,136 crore. Infosys Ltd reported 1.9% of its revenue as coming from healthcare in the same period on total revenue of 12,770 crore

Analysts said the acquisition is timely for Cognizant, coming as it does in the aftermath of the landmark legislation known as Obamacare.

“The US healthcare market has been a target for all the major IT services exporters, which has been triggered majorly by Obamacare and the huge opportunity for digitizing health records. This acquisition will help Cognizant gain a sizeable foothold in the US healthcare market, where it already holds a dominant position compared to its peers," said Raja Lahiri, a partner at Grant Thornton India Llp.

Cognizant’s acquisition of TriZetto will make it tougher for its competitors in the US healthcare market, which is set to see a sizeable increase in spending.

In a report on Monday, analysts with equity research firm Jefferies, a part of Jefferies Group Llc,said, “Cognizant’s capital deployment strategy had been under increasing scrutiny over the past year, with many investors hoping for increased share buybacks and/or initiation of a dividend. With the TriZetto deal, Cognizant introduces debt onto its balance sheet for the first time."

“TriZetto is by far Cognizant’s biggest acquisition ever, and we are mindful of general integration risks associated with large-scale IT services acquisitions," the report added.

The acquisition will enable a lot of cross-selling in business process outsourcing and software and will make Cognizant a strategic healthcare services vendor to many more clients, said an analyst from a Mumbai-based securities firm who did not wish to be named as he is not allowed to speak to the media.

TriZetto’s acquisition gives Cognizant a boost at a time when it has been showing chinks in its armour.

On 6 August, Jennifer Hamel, an analyst at research firm TBR, noted that for the first time since the June quarter of 2011, Cognizant had not outpaced TCS in year-on-year revenue growth in the three months ended 30 June.

In response to an unexpected dip in client spending, Cognizant pared its annual revenue growth forecast from 16.5% to 14% for 2014. On 18 August, Mahesh Venkateswaran, the head of Cognizant’s $500 million SMAC (social, mobility, analytics and cloud) business, stepped down. The 18-year veteran used to report to D’Souza.

Cognizant was advised by Credit Suisse, UBS Securities Llc and Centerview Partners. Legal counsel to Cognizant was provided by Latham and Watkins Llp and Nishith Desai Associates. TriZetto was advised by JPMorgan Securities Llc and Goldman Sachs and Co.

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