Report: MRGE Could Double As Company Explores Strategic Alternatives

Merge Healthcare (NASDAQ:MRGE) fell hard earlier this year when the company announced changes to its business model. In particular, the company moved to offer subscription-based pricing for its healthcare IT software solutions, rather than booking the majority of its revenue in larger blocks as up-front licensing fees. The problem for MRGE shares was that investors saw a major revenue lag about to occur for this health IT vendor as it converted to this new strategy, with an expected drag on financials for the second half of 2012. As a result, the stock plummeted from around $6.50 at the end of March to roughly $2.25 in mid-June. According to company management, MRGE made the change to subscription-based pricing to “align more closely with our clients’ long-term operating plans.” The company also stated that the new model offered flexibility that its clients needed, and would ensure MRGE’s ability to continue to gain share in the healthcare IT software market. In an update provided by the company in August, management said, “Since that time, we have seen acceleration in clients’ eagerness to adopt this type of purchasing model.” The company has begun executing again, posting 2Q revenue growth of 13%, but because shares of MRGE remain substantially undervalued, management announced on September 6th, that it hired an advisor to explore strategic alternatives for the company. While we believe that the market is mis-pricing the shares and that fundamentals could lift the stock back to levels seen earlier this year, MRGE may now be up for sale and the company has potential to be taken out at an even higher level, perhaps double its current valuation or more. Importantly, recent news reports suggest bids are coming to the table from private equity firms.