Oracle and Microsoft Healthcare Investments

Healthcare's Appeal to Tech Giants

A significant shift in focus is currently underway within the enterprise software sector, with healthcare emerging as a primary target. Evidence of this trend can be seen in the substantial investments made by both Oracle and Microsoft in health technology firms this year.

Major Acquisitions Define the Trend

Currently, a compilation of the year’s top 10 mergers and acquisitions is being assembled. Leading these transactions is Oracle’s recent $28.3 billion agreement to acquire Cerner, alongside Microsoft’s $19.7 billion deal for Nuance Communications, finalized in April. Combined, these two deals represent an investment of nearly $50 billion in health-related entities.

Other Players Enter the Healthcare Arena

Several other major companies are also demonstrating interest in the healthcare market. Amazon, while maintaining a lower public profile, has been actively exploring opportunities within the healthcare sector through partnerships, strategic hiring, and various programs targeting this profitable area. Google’s strategy has been somewhat less defined, notably following the departure of its healthcare vertical leader, David Feinberg, who joined Cerner in October – the very company Oracle acquired today.

The Immense Scale of the Healthcare Market

The considerable interest stems from the sheer size of the healthcare market. Oracle cited a figure in its announcement indicating that the U.S. healthcare industry alone is valued at $3.8 trillion annually. Extrapolating this figure globally reveals the rationale behind the willingness of large corporations to make substantial investments to secure a portion of this market.

Analyzing Oracle's Acquisition of Cerner

Beyond the market's potential, what specific benefits does Oracle derive from this acquisition? Insights were gathered from industry experts to assess the implications.

Cerner's Financial Performance

Cerner’s most recent earnings report revealed revenue of $1.47 billion for the third quarter, representing a modest year-over-year growth of 7%. This relatively slow growth rate positioned the company as an attractive acquisition target. Based on a $6 billion annual revenue run rate, the deal is valued at just under 5x revenue, aligning with current market averages.

Market Share in Electronic Health Records

According to data from Klas Research, Epic currently holds the leading position in the U.S. electronic health record market with a 28% share. Cerner follows closely behind with 26%. TechCrunch estimates that Epic’s revenue, based on Cerner’s figures and relative market shares, is approximately $6.3 billion annually.

Strategic Commitment to Healthcare

Gregg Pessin, senior research director at Gartner, emphasized that the acquisition signals Oracle’s strong commitment to the healthcare market. “Oracle has long supported healthcare with its established products. This acquisition clearly demonstrates a full strategic dedication to the healthcare provider industry,” Pessin stated.

Impact on the Healthcare Data Landscape

Anshu Sharma, of Skyflow and formerly of Suki.ai, believes the deal significantly strengthens Oracle’s position in the healthcare records space, consolidating a substantial amount of electronic health record (EHR) data under Oracle’s control and potentially creating disruption for Google, IBM, and AWS.

“Epic and Cerner/Oracle will control the majority of the data, placing Google, Microsoft, AWS, and IBM in a challenging position. Their substantial investments in AI, Watson, Nuance, and Quantum may be compromised,” Sharma explained.

New Opportunities Through Cloud Services

Sharma also suggests that Oracle can now offer “Cerner as a service” via Oracle Cloud. Patrick Moorhead, founder and principal analyst at Moor Insight & Strategies, believes this will unlock new opportunities for the company’s SaaS and IaaS offerings. “Oracle has established strong software solutions with Fusion and NetSuite. The recent development of a competitive IaaS with OCI Gen2, combined with a vertical focus on healthcare, represents a powerful strategic move for Oracle, as provider selection in healthcare IT is typically a long-term commitment,” Moorhead noted, referencing his prior role as chairman of the board at St. David’s Medical Center in Austin, Texas.

Limited Impact on Cloud Market Share

However, John Dinsdale, principal analyst at Synergy Research, questions whether the acquisition will significantly impact Oracle’s SaaS or IaaS business.

Oracle’s infrastructure business has remained stagnant at around 2% market share for the past three years, compared to Amazon’s 33% and Microsoft’s 20%. Similarly, its SaaS business has held steady at approximately 6% market share during the same period, according to Synergy. Dinsdale points out that while Oracle’s cloud revenue has increased, the growth rate hasn’t been sufficient to alter these market share percentages.

Potential for Long-Term Value

“Cloud infrastructure services thrive on scale, and Oracle has consistently lagged behind the market leaders. Oracle has increased its capital expenditure and launched new cloud regions, but its investment levels remain significantly lower than those of Amazon, Microsoft, and Google,” Dinsdale stated.

Regarding the potential impact on these figures, he added, “In SaaS, Oracle would need to aggressively transition its on-premise client base to a cloud consumption model while simultaneously capturing a larger share of new accounts. I don’t foresee Cerner making a substantial difference in either of these areas.”

A Potential Cash Cow

Even if the deal leads to increased EHR data within Oracle, a factor likely to attract regulatory scrutiny, it may not substantially affect the company’s overall SaaS and infrastructure market share. However, if the deal ultimately gains approval and becomes a consistent revenue generator, as NetSuite has been, these concerns may become less relevant.

Investor Reaction and Future Outlook

Currently, investor sentiment appears cautious, with the stock price down over 5% following the deal announcement. Conversely, Cerner’s stock has experienced a modest increase of around 1%.