How TriZetto Can Help Cognizant Technology With Healthcare

In a bid to revitalize its healthcare business, Cognizant Technology Solutions Corp CTSH plans to acquire the IT firm TriZetto Corporation from private equity firm Apax Partners LLP of London.

Will the deal affect the returns of investors in Cognizant, and those in its arch rivals Tata Consultancy Services and Infosys Ltd ADR INFY?

The Health Business

In general, things were going O.K. at Cognizant of late.

Corporate revenues and earnings have been increasing at robust annual rates of more than 20 percent for the last half decade, and after a recent swoon, the stock is reasonably priced at a P/E of about 20.

The company does, however, project activity to slow down over the next year, partially as a result of performance in its healthcare segment, which accounts for about a quarter of overall sales, Reuters reports.

Look To The Indian Subcontinent

Like many IT-related businesses, much of the competition comes from India.

Tata and Infosys look to be threats to Cognizant going forward, and the US-based company will likely keep an eye on developments in this region.

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Analysts project Tata, in particular, to continue to do well.

Revenues and earnings per share at the company have been increasing at a quick pace in-line with analyst forecasts, and the consensus is that growth will continue for the rest of this year at least. 

Infosys has also been performing well, although not at the same pace as Tata, and some analysts who follow the company are calling for growth to taper off a bit.

Final Thoughts

While Cognizant appears to be heading in the right direction, the company projects that a slowdown could be in the future, and thus, made a deal to scoop up IT provider TriZetto in a bid to head-off any lasting affects.

Cognizant also needs to keep an eye out for Indian competitors Tata and Infosys in order to be successful. 

In what might be the only risky part of the deal, Cognizant plans to take on $1 billion in debt to help fund the acquisition. 

Previously the company had no long-term debt on its books. With the potential to add about $1.5 billion to the top line over the next five years, this facet might not be too much of an issue.

Disclosure: At the time of this writing, the author had no position in the equities mentioned in this report.