The Truven Acquisition Is A Game Changer For IBM

  • IBM's $2.6 billion acquisition of Truven is anything but ordinary.
  • Truven brings an end to IBM's spending spree and reduces Watson Health's customer acquisition costs.
  • The Acquisition is also accretive because it increases Watson's value and adds growth momentum to the company.

Ms. Rometty, CEO, Chairwoman & President of IBM (NYSE:IBM), posed the following question in her 2013 annual letter to IBM shareholders.

"What will we make of this moment - as businesses, as individuals, as societies?" - Virginia M. Rometty, CEO, Chairwoman & President of IBM.

Ms. Rometty described IBM's vision in three major points:

  1. IBM would help transform industries and professions with data.
  2. IBM would remake enterprise IT for the era of cloud.
  3. IBM would reimagine work by helping clients build systems of engagement, underpinned by the imperative of security.

One of the major pieces to bring that vision to life is the recent $2.6 billion acquisition of Truven Health Analytics.

Truven, based in Ann Arbor, Michigan, provides health-care data services to employers, hospitals and drugmakers to help them gauge the efficacy of products and services. Its software can scan millions of records and, for example, tell employers or hospitals whether patients were given unnecessary procedures.

Thesis: Truven Health Analytics is a cost-effective and accretive acquisition - potentially the last piece of the puzzle - that will enable IBM to "transform industries and professions" while increasing shareholder value.

Why The Truven Acquisition Is A Game Changer For IBM?

Watson's latest acquisition is anything but ordinary. IBM has spent north of $4 billion in M&A activities in the last 12-months in an attempt to give Watson computing system access to a deep, broad repository of health data.

This is why we believe that the Truven Health Analytics acquisition might just be the last piece of the puzzle to make IBM Watson complete. IBM's SVP of solutions portfolio and research unintentionally hinted about this idea when he made the statement:

"'We have all of the major data sets that we need,' John Kelly, IBM's SVP of solutions portfolio and research, told the Wall Street Journal." - FierceBiotechIT

This could give Watson all the needed health data because the deal will increase IBM's patient lives by 200%. Patient "lives" is a synonym for a dataset or a record. IBM will acquire 200 million patient lives from the Truven acquisition.

"With Truven, IBM gets '200 million lives which we can combine with 100 million patient records. We can combine our data sets together, including one of the largest democratized health records with electronic health records from Phytel, Truven, claims data, imaging data, genetics, medical health data and from all of that we can run analysis,' Watson Health General Manager DiSanzo told Fortune in an interview."

Having access to 300 million patient lives makes more sense when you put it into context. The U.S. Census Bureau reported that the U.S. population is ~321 million as of July 4th, 2015. Taking age into consideration, it is almost the entire population of everyone 10 years and above.

Most importantly, the Truven acquisition might signal an end and a beginning. This would imply an end to the spending spree and a beginning for Watson Health Analytics to start generating significant revenues for investors.

But what makes this data lucrative to investors are the hands of IBM?

The lucrative value in the Truven acquisition is more than just about data, it is about the value of the ability to make sense of the data. Truven will add more resources used to interpret the data and this will help IBM provide data and knowledge driven insights as they attempt to scale the Watson Health division. For instance, the acquisition includes 2,500 Truven employees comprising of data scientists, researchers and other experts critical to helping Watson Health move forward.

(Source: IBM - What is Watson?)

Furthermore, IBM is well-positioned to evaluate and add value to unstructured data. The company reports that 80% of all the data today is unstructured.  This is where IBM Watson comes in. IBM Watson is a "technology platform that uses natural language processing and machine learning to reveal insights from large amounts of unstructured data." If Watson lives up to expectations, IBM is well-positioned to generate tremendous shareholder value from the vast amount of health care data acquired in the last 12-months.

Also, the acquisition is a cost efficient deal. The financial benefits of the Truven deal transcend access to just more data, it will save IBM a lot of money as it minimizes customer acquisition costs. The deal comes with a portfolio of large, well-established and well-capitalized clientele. Truven claims 8,500 clients including hospitals, insurance companies, and federal and state agencies. Some big names include Cigna (NYSE:CI), CalPERs, HCA (NYSE:HCA) , Liberty Mutual Insurance, and Newton-Wellesley Hospital.

"As part of the purchase, Truven will turn over its library of health industry data collected from more than 8,500 insurers, hospitals and government agencies to IBM, which in turn will be included in Watson Health's own database. The deal is expected to wrap up later in the year." - Tech Times

This will add to IBM's rich portfolio of partners: Apple (NASDAQ:AAPL), Medtronic (NYSE:MDT), Johnson & Johnson (NYSE:JNJ), Teva Pharmaceutical (NYSE:TEVA), Novo Nordisk (NYSE:NVO), and CVS Health (NYSE:CVS).

Lastly, Truven integration with IBM will be easier because they have worked together. Truven has used IBM Cognos business intelligence software for years and has partnered with IBM's Watson unit for the past 15 months. This is why we believe that Truven Health Analytics is a cost-effective accretive acquisition - potentially the last piece of the puzzle - that will enable IBM "transform industries and professions" while increasing shareholder value.

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