‘It’s a huge deal.’ What would the sale of Cerner mean to its hometown of Kansas City?
The news came as little surprise to those who have been paying attention.
For years, rumors had swirled that Cerner Corp., a healthcare IT giant, was a prime target for an acquisition. The company throws off billions each year in profits and has decades of experience building the technological backbones of hospitals and clinics.
Some of the biggest tech companies in the world like Amazon, Google and Apple have expressed growing interest in the lucrative world of healthcare. All have been mentioned as potential buyers of Cerner. The hiring of former Google executive David Feinberg, who started in October as Cerner’s new chief executive, only fueled takeover speculation.
But it’s software giant Oracle that has come closest to making the buy. On Thursday evening, the Wall Street Journal reported that Oracle was in talks to purchase Cerner in a deal worth potentially $30 billion.
“I don’t think it’s surprising that Cerner’s the target of a takeover. That’s been speculated for quite a while,” said Nathan Mauck, an associate professor of finance at the University of Missouri-Kansas City. “A lot of folks speculated on different buyers. I don’t know that I heard Oracle’s name come up, but it makes some sense for Oracle to look at Cerner.”
Oracle is known for its aggressive acquisition strategy, having purchased dozens of companies in the last decade alone. But the purchase of Cerner would be the largest deal in that company’s history and one of the largest mergers of the year if completed.
“Obviously, it’s a huge deal,” Mauck said. “Cerner’s gotten so big it takes somebody really big to buy them.”
The terms of the reported deal are unknown at this time. And neither company has commented on the potential merger.
But mergers almost always mean job losses for the firms who are acquired. Companies look to realize savings by cutting duplicate jobs. Mauck pointed to Oracle’s 2004 purchase of PeopleSoft, a human resources software firm. Weeks after the $10.3 billion sale, Oracle slashed 5,000 jobs from the combined companies to realize an estimated $1 billion in merger savings.
The good news: Oracle said it would keep the vast majority of the legacy technical staff at its once-competitor PeopleSoft. So that may protect many of the software engineers and other technical experts in Cerner’s ranks, Mauck said, if not the executives and corporate support staff.
Similarly, he said Cerner may be better positioned than a company like PeopleSoft, because it doesn’t compete directly with Oracle in the electronic health record market.
“Buyers are always looking for synergy,” Mauck said. “Some of that comes from new revenue but it also comes from cost control. And cost control means layoffs.”
In a research note on the potential merger, stock analyst Brent Reback with Stifel concluded that Cerner would make a “solid fit financially” with Oracle. He pointed out that Cerner’s gross margin is about 80%, while it’s operating margin is about 20%. Both are measures of profitability, but the gross margin only considers the money left over after accounting for direct costs of producing goods or services. The operating margin, by contrast, takes into consideration the wider costs of overhead and business operations.
That void, Reback said, leaves “a significant amount of operational efficiency for Oracle to capture.”
It’s unclear what Oracle plans for Cerner’s global workforce of 28,000, which includes some 13,000 workers in the Kansas City area.
But even if the company were to retain many of those jobs, the loss of the region’s largest corporate headquarters would certainly ripple through the business community.
“Cerner’s contributions to the vitality of the Kansas City economy are too numerous to mention, so the potential of Oracle purchasing Cerner creates anxiety,” said Tim Cowden, president and CEO of the Kansas City Area Development Council. “If this acquisition comes to fruition, it would certainly impact our region in a significant way.”
Cerner’s rise in Kansas City
The idea came as three coworkers sat around a picnic table in Kansas City’s Loose Park in 1979.
Neal Patterson, Paul Gorup and Cliff Illig all worked for Arthur Andersen & Co., a major holding company out of Chicago. But they were sure there were bigger opportunities in the world of software and information technology.
In 1982, the company introduced its first clinical product, a laboratory information system, at a hospital in Tulsa, Oklahoma. By 1985, it was expanding into Canada and the United Kingdom.
The next year, Cerner went public, offering stock for $16 a share on the NASDAQ. Before news of the merger sent prices up on Friday, Cerner’s stock was trading close to $80 per share. On Friday, it closed near $90.
In 1988, the local chamber named Cerner the small business of the year.
For years, Cerner was synonymous with growth in Kansas City, as it added employees to aid its efforts of transferring the nation’s paper medical records into electronic records that could be easily shared and accessed by doctors across hospitals.
Cerner celebrated the hiring of its 1,000th employee in 1994. By 2019, that figure had grown to 30,000. Now, the company is a market leader for electronic health records, the standard across the American medical system, behind only its rival Epic, a Wisconsin healthcare IT firm.
“They are an example of a homegrown business that has seen tremendous global success,” said Joe Reardon, president and chief executive of the Greater Kansas City Chamber of Commerce. “Cerner operates in a very competitive and growing market so it is not surprising such a successful company would be sought out by others, especially in a global market.”
Even after it went public, Cerner was firmly a Kansas City company.
Patterson stayed on until his 2017 death from cancer. In his absence, another founder, Cliff Illig, took the reins until Brent Shafer in 2018 became the first outsider to lead the company.
Illig and Patterson were among the five partners that bought the local professional soccer franchise from Lamar Hunt in 2006. Many credit that move and the rebranding to Sporting KC as crucial for keeping a major league soccer presence in the region.
The departure of the founders, though, ushered in an era of change at Cerner.
Shafer changed up much of the executive leadership of the company and started what he called a “transformation,” in which outside consultants scoured the business looking for the best ways to stay relevant and competitive. He and the board were motivated to not only work on electronic health records — a saturated market by now — but to find new ways of utilizing the company’s technical software expertise and leveraging its wealth of healthcare data for new business lines.
Shafer’s tenure also brought on a wave of layoffs as the company sought to cut unprofitable business lines and focus on the areas of the business it viewed as most important for the future.
But none of that has changed Cerner’s status as the region’s largest private employer.
With 13,000 workers in the Kansas City area, Cerner’s local workforce is topped only by the federal government and Children’s Mercy hospital, according to the Kansas City Economic Development Corporation. The region’s next largest private employer is Honeywell with about 5,000 workers.
The impact of HQ losses
Traditionally, cities value headquarters operations above other types of business.
For one, headquarters bring high paying jobs and their associated payroll taxes. But companies also tend to play larger civic and philanthropic roles in their hometowns as compared to auxiliary locations.
Crucially, mergers also mean a loss of local control.
Currently, Cerner executives in Kansas City make big decisions about business strategy, employment and real estate.
“And now Cerner strategy and what happens to their employees is in Austin,” the Texas city where Oracle is located, said Mauck, of UMKC. “So it just creates a lot of uncertainty…and that’s pretty much true of all mergers: the firm that previously controlled its own destiny gives up control.”
While the recent losses of several corporate headquarters have stung many leaders in the area, Reardon remains more optimistic.
He said T-Mobile’s 2020 purchase of Overland Park’s Sprint. Corp. put that firm in a stronger position, as T-Mobile committed to keeping some jobs here at Sprint’s historical campus. Many analysts thought the company might have gone under completely without the merger.
Similarly, Reardon praised the sale of the Kansas City Southern railroad to Canadian Pacific. The combined company will be called Canadian Pacific Kansas City. The Canadian firm plans to maintain its global headquarters in Calgary, while its U.S. headquarters will stay in Kansas City at Kansas City Southern’s downtown office building. That merger, Reardon noted, allows the firm to create the first railroad spanning North America with operations in Canada, the United States and Mexico.
“These transformations bring global innovation and exposure,” Reardon said. “Kansas City is an affordable, dynamic city with strong talent at the ready. Whatever the future brings for Cerner, we want to see it continue to grow while keeping strong roots in KC.”
Cowden, of the Kansas City Area Development Council, has mixed feelings about the move. On one hand, he believes Oracle sees value in Cerner’s global business and specifically its local talent in Kansas City.
“Cerner grew from three employees to thousands around the world from an idea born in Kansas City,” he said.
He noted that Cerner’s influence has spilled over into other healthcare technology firms, with companies like Netsmart and Wellsky staffed by ranks of former Cerner employees.
But Cowden, whose organization works to recruit new businesses to the area, said Oracle’s purchase would underscore the need to bring new employers to the region.
“This potential acquisition reinforces the critical need to attract new companies,” he said, “that bring fresh capital — intellectual and financial — to the Kansas City region.”
This story was originally published December 19, 2021 at 5:00 AM.
