Merge Health Care - An Insider Story

Merge Health Care (MRGE $2.35) is a small cap health care technology company that according to its website:

...develops solutions that automate healthcare data and diagnostic workflow to enable a better electronic record of the patient experience, and to enhance product development for health IT, device and pharmaceutical companies. Merge products, ranging from standards-based development toolkits to sophisticated clinical applications, have been used by healthcare providers, vendors and researchers worldwide for over 20 years.

So what?...you may ask...and rightfully so. After all, small cap software companies are a dime a dozen AND the market sucks. Well, in my opinion, there are a several factors that make MRGE an interesting investment idea. However, it may be prudent to first take a look back its ugly corporate history to get a sense of how MRGE got where it is:

• 12/05 - MRGE stock price peaks at $30, as recent quarterly EPS hits $ .28. Only problem...few knew at the time that the numbers weren't real.
• 11/06 - MRGE announces restructuring plan as stock drops below $7.
• 10/07 - Accounting scandal breaks and the sh*t hits the fan, as MRGE delays earnings and announces that prior earnings will be restated downward. Wall Street analysts start dropping coverage. Stock price plummets to below $2.
• 06/08 - On the verge of insolvency, with a stock price south of $1.00, Merrick RIS, LLC steps up to the plate to rescue MRGE with a $20,000,000 investment. Turnaroun begins.
  

In my opinion. there are three primary reasons to consider Merge Health Care at this time:

1. The successful turnaround history of the new management team and recent heavy insider buying by Michael Ferro through Merrick RIS, LLC.
2. The $787 billion American Recovery and Reinvestment Act passed in 2009 that provides $20,000,000,000 over the upcoming years to encourage hospitals and physicians to automate electronic health records and also provides future penalties if they fail to do so.
3. The 2009 $124 Billion Chinese government stimulus package to automate its health care system. MRGE has an important presence in China and should be well positioned to capitalize.
   

MERGE has been on an acquisition binge since Ferro took over, following a similar game plan he successfully used in growing a company called Click Commerce:

• July 2009 - Acquired E-Trials Worldwide
• September 2009 - Acquired Confirma
• April 2010 - Outbid a rival private equity firm to acquire Amicas

In all honesty, as an outside investor, it is difficult to independently judge with certainty whether Merge management's strategy to grow revenues and take advantage of synergies through these acquisitions will prove successful. Furthermore, it should be noted that Merge took on $200,000,000 of debt in the form of 5 year notes to finance its most recent acquisition of Amicas, increasing both the risk and the reward profile of this investment. However, when you look at the the continued insider buying from an insider who has already purchased over 30,000,000 shares, in combination with all the global stimulus money being put into this sector in the upcoming years, MRGE seems like a reasonable investment and I have taken a position. If Ferro follows with his Click Commerce playbook, he will likely put MRGE up for sale once its presence as a leading medical imaging technology company has become established.

These are the personal views of Wall Street Titan and should not be the basis of your investment decisions. Multiple links are provided in this note that all readers are encouraged to click and do their own due diligence.