Almost Thumbs Up for Towers Watson’s Acquisition of Extend Health | Sherpas in Blue Shirts

Following Towers Watson’s acquisition of Aliquant in early 2011, its May 13, 2012 announcement of its agreement to acquire Extend Health, Inc., which operates one of the largest private Medicare exchange in the United States, is clear confirmation of its belief in the potential growth of the entire U.S. health and welfare (H&W) market.

And there are a number of factors that make Extend Health’s offerings an attractive solution for Towers Watson to have in its arsenal:

  • Multiple surveys indicate that quite a few organizations are planning to re-evaluate their employer-sponsored plan strategy for the retiree population in the coming years
  • There is an increasing realization that retiree exchanges are not only more economical for employers but also provide better individual options to participants
  • This is still a fairly new model, pioneered by Extend Health in 2006 (and there’s inherent value in being first to market)
  • With hundreds of thousands of baby boomers reaching retirement age in the not-too-distant future, there is significant headroom for growth

It also likely paves Towers Watson’s path into the active employee exchange market, which providers playing in the retiree market see as a natural next step extension of their offerings. For example, both Aon Hewitt and Mercer recently announced active employee exchange solutions. But several words of caution here: 1) the rate of active employee exchange adoption must be closely watched as it is fairly nascent today; 2) while all the Tier 1 providers now have “exchanges” in their offerings arsenals, they are, in a way, disruptive to the traditional benefits administration business model; and 3) it’s unclear how this will dovetail with the state exchanges that will come into play in 2014 if things remain track on with healthcare reform.

What is clear is that Towers Watson really liked what it saw in Extend Health, as what began as an announced partnership in August 2011 became an acquisition less than a year later. And one can understand why: the projected run rate for 2012 and the expected growth rate for 2013 is expected to be 30 percent or more.

There is, however, one aspect of this deal that I don’t like. The US$435 million price paid represents a >7X multiple on current revenues. This kind of multiple is typically available for a pure software company, as opposed to a services-bundled technology offering. However, it seems Towers Watson didn’t want to be a late market entrant, as exchanges represent an increasing barrier of entry for new providers as the existing ones scale up their capabilities and client bases. What do you think? Did it made the right bet?

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