Biggest Industry IT Vendor Gets Bigger

Blockbuster deals are not confined to the substance abuse industry these days, but also are to be found not surprisingly among the companies that supply the industry. In that vein, Netsmart Technologies Inc. (Nasdaq: NTST) announced in September that it had acquired CMHC Systems of Dublin, Ohio, in a transaction that will make Netsmart, already the behavioral health care industry’s largest information technology provider through its Creative Socio-Medics unit, even bigger.
Netsmart’s competitors, including other top treatment industry IT vendors like Sequest Technologies and Qualifacts Systems, may feel some pressure themselves to merge with other players in order to attempt to match the scale that has now been achieved by Netsmart. Earlier this year, Qualifacts was involved in merger negotiations with another IT vendor that broke down because the two sides could not agree on price, according to Qualifacts CEO Steve Mason. After its merger with CMHC, Netsmart now has over 1,150 behavioral health industry clients, 141 of which are addiction treatment centers, including top industry names such as Hazelden and Betty Ford. Despite Netmart’s size, the behavioral health IT business remains highly fragmented, just like the addiction treatment and behavioral health industries it serves.

In a filing earlier this year with the Securities and Exchange Commission, Netsmart listed 14 vendors it considers to be competitors in the behavioral health IT space. Netsmart’s presence in the addiction treatment industry is not nearly as considerable as in other parts of behavioral health, including in the area of big state contracts, where Creative Socio-Medics is strong, and in community mental health centers, where CMHC is overwhelmingly dominant. “We are in the midst of a strategic review of the business following our merger with CMHC,” says Netsmart CEO Jim Conway. “And a big part of that will be a very strong focus on increasing our marketing efforts to get a bigger slice of the addiction treatment IT market.” One area where Netsmart is dominant, however, is in a niche part of the addiction treatment IT market, computerized automated methadone dispensing. The company solidified its position in the niche this summer with the purchase of Addiction Management Systems, a pioneer in developing computerized automated methadone dispensing.

Netsmart’s nearly $18.2 million cash and stock deal for CMHC has been warmly greeted by the stock market, which since the deal was announced on September 20 had pushed up the value of Netsmart’s shares by nearly 25 percent to almost $15 per share by the end of October, giving Netsmart a total market capitalization of around $86 million. The rise in the share price was very good news indeed for CMHC founder John Paton, who took slightly less than 400,000 Netsmart shares as part of the purchase price for CMHC, which he founded in 1978. Paton was highly visible just days after the acquisition announcement, speaking at an important Washington behavioral health IT conference. However, it is Conway who will hold the reins at the new company, which will jettison the Creative Socio- Medics and CMHC names, henceforth operating as Netsmart. Since Conway joined the company in 1999, the company’s revenues have grown by over 450 percent to $50M, with some of that growth from acquisitions, but most coming from organic internal efforts, according to Conway.