3M to Stay in the Health Informatics Business

After announcing in September that it had hired Goldman Sachs to help it "explore strategic alternatives" (i.e., find a buyer) for its Health Information Systems business, 3M has concluded that it won't find a purchaser -- at least not at a price it will accept -- and will retain the business. This is an abrupt U-turn, but morale in the unit doubtless collapsed following the announcement, and canvassing potential buyers can't have taken very long. 3M is back where it started, committed to investing in a business it didn't want to retain.

Why try to get out of the business? An attempt to exit this business comes as no great surprise. The sector became very fashionable, and therefore very crowded, with the entry of government into all aspects of healthcare with the arrival of the Affordable Care Act. Xerox had already announcedthat it was shuttering significant parts of its healthcare software activities, and in 2014 the privately held healthcare informatics specialist TriZettodecided that the better part of valor was to sell itself to Cognizant.

With revenue of $760 million and more than 5,000 hospitals contracts, 3M Health Information Systems had grown successfully in what was a high-growth environment, but which will progressively become more difficult. The Trizetto/Cognizant combination added yet another strong company to a crowded field in which 3M is a comparatively minor player.

Health informatics accounts for 2.5% of 3M's revenue, having grown very rapidly over the last several years. However, it's probably loss-making (3M hasn't disclosed its P&L, but the business is in its very early growth stage, and it's unlikely to have thrown off profits yet.)

What to do with it now?It's likely that 3M will tough it out for at least another few years, hoping to grow this division into adequate size and profitability to make a sale possible at some later date (and perhaps in stock market conditions that favor stronger valuations). Obviously, 3M had hoped to use elsewhere in its empirethe resources that will now be absorbed in bolstering healthcare software's competitive position. Since the disposal strategy would have been based on 3M's analysis of the likely returns on the investment options available to it, the failure to sell the division at an acceptable price is clearly suboptimal. The company has apparently decided that continuing to invest in it is a superior alternative to selling it cheap or shuttering it. There's a strong risk that 3M is simply postponing a decision that won't go away, in the meantime increasing its investment in a business that it has already decided it doesn't want to pursue.

3M could seek alliances, but combinations of weak players rarely mount successful challenges to strong ones, especially in software businesses. The strong players have already shown that they don't have enough interest in what 3M has to offer to buy it, so they probably aren't interested in partnering with it.

Is 3M serious about managing its portfolio?3M has made much of its strategy of "strengthening and focusing its portfolio of businesses," introduced in its 2013 annual letter to shareholders. To date, this has been a matter of tinkering with its reporting structure: It has made no major acquisitions or disposals and shut down no significant businesses. The health informatics affair doesn't suggest any great willingness to make difficult decisions. Since 3M's total revenue has grown at a compound rate of only 3% over the last 10 years and 4.6% from the bottom of the recession, perhaps it's understandable that the company is reluctant to reduce it by taking such measures. But its announced strategy of portfolio management involves a commitment to margins, reflecting the recognition that pursuit of revenue growth hasn't provided the earnings growth its investors require. Its actions in the healthcare software case demonstrate pretty weak commitment to this strategy.

3M seems to have hit a revenue growth wall. If it can't overcome this, it must concentrate on margin improvement in order to grow. Portfolio optimization is an obvious solution for a company as diverse as 3M. But if the health informatics affair is indicative, 3M doesn't seem very committed to making the decisions (and possibly the write-offs) that active management of its portfolio requires. Investors who look to 3M for growth rather than income could be very disappointed.

The article 3M to Stay in the Health Informatics Business originally appeared on Fool.com.

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