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For now, CBaySystems CEO Raman Kumar has sated his appetite for deals. By his own account, MedQuist, the largest provider of medical transcription software technology and services in the world and the latest addition to his medical transcription business, will take some “digesting”.

“This is the big one, the one we’ve been waiting for,” says Kumar of the $285 million (£144 million) deal struck with Royal Philips Electronics that has catapulted the business he founded in 1998 from the third-largest player in the medical transcription sector to the number one slot.

Kumar has had an eye on the “troubled” target for some time. However, it was not until May that the deal was announced, taking combined revenues to an estimated $400 million (£201 million) and dwarfing CBay’s nearest competitor, Spheris. The deal, in which CBaySystems is set to acquire 69.5 per cent of Medquist, is expected to complete later this year.

Given the size of MedQuist, the deal constitutes a reverse takeover. It was backed by SAC Private Capital Group and Lehman Brothers who put in $123 million
(£62 million). The investment is set to give them a 57.8 per cent stake in the enlarged share capital of CBaySystems Holdings while Philips will maintain a convertible equity stake in the company.

Take this down

Based in Chesapeake Bay, Maryland, CBaySystems supplies hospitals, healthcare networks and physician practices across the US with transcription services. The bulk of the work involves converting voice recordings made by doctors into electronic text documents for patients’ medical records. This is offshored to India, where Kumar has built a nifty network of some 30 “processing centres” through acquisition and franchise deals.

In December the company posted EBITDA of $4.9 million (£2.5 million) on revenues of $57 million (£28.6 million). With an average growth rate of around 70 per cent since inception, Kumar says revenues are being driven by an aging population making more hospital visits and healthcare practitioners wanting to cut costs.

Once-mighty MedQuist

When Kumar details the numerous acquisitions he has made in the US and India prior to the “big one”, a recurrent theme of these recollections is “sharp deals”.

In 2000, Royal Philips Electronics bought a 60 per cent stake in MedQuist for $1.2 billion ($51 per share), subsequently upping its shareholding to 69.5 per cent. However, alleged over-billing practices have led MedQuist into financial and legal wrangles, lawsuits, compensation payouts and a Nasdaq de-listing. “In 2003 MedQuist got into trouble. This is when we knew that the company would become a target at some point,” asserts Kumar. Since this time, the market leader has floundered and its latest figures show a six per cent slump in revenues, falling from $89.1 million to $83.7 million in the first quarter of the year.

CBay snapped up Philips’ 69.5 per cent stake in its rival for $11.00 per share, a 47 per cent premium. The CEO admits that MedQuist’s business model – which also services US clients but keeps most of the work onshore – needs some work as the business has been in fire-fighting mode since 2003.

MedQuist currently offshores seven per cent of its business to India, compared with CBay’s 98 per cent. This is where Kumar sees potential to “add value”, cutting costs of back office operations and boosting revenue:

“MedQuist has kept its exposure to India to a minimum because it’s a minefield. If you don’t know how to navigate the country, you can end up with problems. You need to be a specialist in India and that’s what CBay brings to the deal.”

He adds, “I believe that integration will be simple. When you combine a high-price seller, such as MedQuist with a low-cost producer like CBay, you create a magnum opus.”

US growth strategy

Over the last ten years, CBay has paved the way for transactions, such as the MedQuist mega-deal by cutting its teeth on a number of smaller deals with a series of backers.

In 1999, the first round of funding came from family and friends, followed by angels and venture capitalists, private equity and hedge funds, and more recently a placing on AIM, all of which have given Kumar the firepower to make a string of acquisitions in the US and India.

In June 2007, CBay raised £12.7 million on AIM with the issue of 14 million shares at 89p per share. The placing valued the company at £57.9 million. Its market capitalisation has since dropped to £46.15 million.

In the US, the company initially grew organically and its maiden acquisition was Advanced Transcription Services (ATS) in 2002. The £4.5 million-turnover Detroit company was acquired with private equity backing for $2.6 million. Kumar admits he bought ATS for its client roster, which included the Henry Ford Hospital and the University of Michigan.

“It was a very sharp deal. We bought the company for its clients. People said it was risky because we might lose them in the takeover, but we didn’t,” he says.

Post-acquisition, Kumar has taken ATS’s operations offshore, creating the template for future acquisitions: “This deal was our proof of concept – we experimented and boosted revenues by offshoring work to India and improving client relationships.

“We were able to pay in cash and loan notes, which freed up working capital. It was the same procedure for MedQuist, but on a smaller scale.”

In the three years following the acquisition, ATS’s revenues have almost doubled, topping $8 million.

In 2004, CBay acquired EDS for $1.4 million. The small transcription company, also located in the Detroit area, had Henry Ford on its books and a turnover of $2.25 million. “We made the acquisition to consolidate the Henry Ford business.”

Since then, although there have been a few missed opportunities, Kumar admits he has been on the lookout for a “sizeable” medical transcription business: MedQuist was on the radar.

Expanding into India

Kumar took a different tack in India, preferring to expand his back-office operations through a franchise model. The CEO explains that the rationale behind franchising was to enable him to concentrate on acquisitions in the US and focus on technology:

“We didn’t want to invest in processing centres in India. We preferred entrepreneurs to invest their money and tie up with us on an exclusive basis. We did this to conserve capital. It was an efficient business model – a creative back-end process, which enabled us to concentrate on the marketing and technology sides of the business.”

CBay has set up more than 30 production centres in India, in ten to 15 cities across the country. “It’s a large catchment area for training new staff to bring into the business and all these costs were covered by the franchisees.”

However, as a result of the Health Insurance Profitability and Accountability Act (HIPAA), larger clients such as US hospitals, wanted CBay to own the transcription work from end to end and to limit the use of independents. This development caused Kumar to rethink his franchise model and to start acquiring processing centres, ensuring end-to-end ownership of the work process.

Business as usual

Kumar insists that the offshoring business he founded in 1998 is no different to the model used by multinationals such as Nike or Reebok: “You put your brand out there, put the processes in place and the manufacturing units remain independent.”

Despite criticisms that offshoring to India, primarily from the US, has put a strain on the infrastructure of many of the larger urban centres such as Bangalore and Mumbai, Kumar, who divides his time equally between Maryland and Bangalore, is positive about the effects of offshoring on the sub continent.

“There is no doubt that India’s biggest export is IT and IT services, which make up some 35 per cent of the Indian economy and contribute billions of dollars. I am glad to be part of this.”

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