Fairness opinions › Digital / HealthTech › 2015

Merge Healthcare acquired by IBM Watson Health: fairness opinion by Goldman Sachs

Announced August 6, 2015 · One-step merger · All cash · DEFM14A filed September 11, 2015

Digital / HealthTech Specialty

Enterprise value

$1.0B

EV / LTM EBITDA

19.5x

EBITDA $53.2M · 20% margin

EV / LTM revenue

3.97x

revenue $261M

DCF discount rate

10.0%–12.0%

Exit multiple

Deal terms

ConsiderationAll cash

Price per share$7.13

Premium31.8%

Premium basisclosing price of $5.41 per share on August 5, 2015

StructureOne-step merger

Termination fee$26.0M

Reverse termination fee—

Go-shopNone

Outside date—

FilingDEFM14A · EDGAR index

Implied value per share by method vs. $7.13 offer

Precedent transactions — EV / LTM EBITDA $3.55 – $7.94

Discounted cash flow $5.87 – $8.24

Illustrative Present Value of Future Share Price Analysis $4.96 – $7.07

Selected Historical Premia Analysis $6.76 – $7.84

Ranges as disclosed in the banker’s summary of analyses; the red line marks the per-share consideration.

Opinion of Goldman Sachs to the target board

Delivered August 6, 2015 · Fee $13.0M ($13.0M contingent on closing)

Discounted cash flow assumptions

Discount rate10.0%–12.0%

Basisweighted average cost of capital

Terminal valueExit multiple

Perpetuity growth4.4%–7.8%

Exit multiple11.0x–15.0x terminal year EBITDA

Projection period2H2015E-2019E

Projections usedcompany projections (management Forecasts)

Implied value per share$5.87–$8.24

Unlevered free cash flows discounted to June 30, 2015 for the six months ending December 31, 2015 and the four years ending December 31, 2019; added net cash and present value of net operating losses (NOLs discounted at 7.0% cost of debt), deducted debt and Series A Convertible Preferred Stock. Exit multiples implied perpetuity growth rates of 4.4% to 7.8%.

Selected precedent transactions (8)

Date	Target	Acquirer	Multiple
2005	IDX Systems	GE	20.8x EV / LTM EBITDA
2006	Per-Se	McKesson	15.6x EV / LTM EBITDA
2008	TriZetto	Apax	15.0x EV / LTM EBITDA
2010	Eclipsys	Allscripts	13.7x EV / LTM EBITDA
2010	Phase Forward	Oracle	12.6x EV / LTM EBITDA (subsequently corrected to 13.1x)
2012	Sunquest	Roper	12.2x EV / LTM EBITDA
2011	Emdeon	Blackstone	11.9x EV / LTM EBITDA
2008	Emdeon	General Atlantic and Hellman & Friedman	11.6x EV / LTM EBITDA

Multiple	Low	Median	High	Range applied	Implied per share
EV / LTM EBITDA	11.6x	—	20.8x	12.0x–21.0x	$3.55–$7.94

Other analyses

Analysis	Summary	Implied per share
Illustrative Present Value of Future Share Price Analysis	Applied one-year forward EV/EBITDA multiples of 12.0x to 14.0x to forward EBITDA estimates for CY2016-CY2019 to derive year-end 2015-2018 future share prices ($5.28 to $10.93 undiscounted), discounted to June 30, 2015 at a 13.3% cost of equity. Results: FY2015E $4.96-$5.89; FY2016E $5.39-$6.45; FY2017E $5.95-$7.03; FY2018E $6.03-$7.07.	$4.96–$7.07
Selected Historical Premia Analysis	Reviewed acquisition premia for announced and completed all-cash and cash/stock U.S. transactions between $500 million and $2 billion from January 1, 2010 to August 5, 2015 (average premia: 2015 28.0%, 2014 38.8%, 2013 31.0%, 2012 43.9%, 2011 35.5%, 2010 31.0%); applied a 25%-45% premium range to the August 5, 2015 closing price of $5.41.	$6.76–$7.84
Historical Stock Price Performance	Reviewed trading prices from August 3, 2012 to August 5, 2015. $7.13 represented a 31.8% premium to the $5.41 August 5, 2015 close; premiums to 30-day, 3-month and 6-month VWAPs of $5.13, $4.75 and $4.73; and an 18.0% premium to the highest closing price of $6.04 during both the 52-week and three-year periods ended August 5, 2015.	—

Engagement letter dated July 13, 2015; transaction fee of approximately $13 million, all payable upon consummation of the merger. Goldman Sachs' Investment Banking Division received approximately $10 million in compensation from IBM and/or its affiliates during the two-year period ended August 6, 2015.

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Management projections

Projection year	Year 1	Year 2	Year 3	Year 4	CAGR
Revenue	$301M	$334M	$366M	$393M	9.3%
Revenue growth	15.6%	10.7%	9.8%	7.4%
EBITDA	$63.7M	$73.8M	$85.5M	$93.5M	13.6%
EBITDA growth	19.7%	15.9%	15.9%	9.4%
EBITDA margin	21%	22%	23%	24%
Implied EV / EBITDA	16.3x	14.0x	12.1x	11.1x

Year-1 growth is against LTM at announcement ($261M revenue, $53.2M EBITDA); later years are year over year.

Management's internal "company projections" for fiscal years 2015-2019 were reviewed by the board, used by Goldman Sachs, and provided to IBM (excluding unlevered free cash flow and non-GAAP EPS). Non-GAAP revenue grows from $260.8 million in 2015 to $393.1 million in 2019; non-GAAP EBITDA from $53.2 million to $93.5 million; non-GAAP EBIT from $36.8 million to $79.2 million; non-GAAP net income from $19.2 million to $49.9 million (EPS $0.19 to $0.49). Unlevered free cash flow rises from $40.4 million in 2015 to $59.7 million in 2019. Projections did not give effect to the merger.

Process notes

Single fairness opinion from Goldman Sachs delivered orally and confirmed in writing August 6, 2015 to the Merge Healthcare board. Goldman Sachs was not asked to and did not solicit third-party interest. IBM raised its price from $7.00 to $7.13 per share in exchange for Merrick Ventures' waiver of a $15 million consulting fee; the board considered forming a special committee in light of the Merrick consulting agreement. Director Justin Dearborn recused himself from the board vote after agreeing to a post-closing IBM offer letter. The board considered Goldman Sachs' prior and ongoing relationships with IBM (approximately $10 million of fees over the prior two years) and concluded independence was not impaired. IBM refused a go-shop provision and the ability to terminate for a superior proposal; the termination fee was negotiated down from IBM's proposed $35 million (company asked for $18 million) to $26.0 million. Certain stockholders, including Merrick Ventures and Guggenheim, signed stockholders agreements. A footnote discloses that the Oracle/Phase Forward multiple should have been 13.1x rather than 12.6x.

Other Digital / HealthTech fairness opinions

Press Ganey Holdings / EQT 2016 · 16.1x EV/EBITDA
Everyday Health / Ziff Davis 2016 · 10.3x EV/EBITDA
Imprivata / Thoma Bravo 2016
Accelrys / Dassault Systèmes SA 2014 · 16.3x EV/EBITDA
WebMD / Internet Brands 2017 · 11.9x EV/EBITDA
Greenway Medical Technologies / Vista Equity Partners 2013 · 33.9x EV/EBITDA

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