Healthcare services provider McKesson (mck) said it would combine most of its information technology business with Change Healthcare Holdings to form a new company with combined pro forma annual revenue of $3.4 billion.
Change Healthcare, a provider of software and analytics, network solutions, and technology-enabled services, will contribute all of its businesses to the new company, with the exception of its pharmacy switch and prescription routing business.
Tennessee-based Change Healthcare is majority owned by Blackstone Group (bx).
The new company will be able to offer managed care companies technologies for financial and payment solutions as well as tools for administrative and clinical management, said McKesson, which has a market value of about $39 billion.
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In 1999, McKesson entered the healthcare technology sector by purchasing a large tech company, HBO & Co., for $14.5 billion. Shortly after the deal, auditors discovered that HBO & Co. had been fraudulently boosting sales, eventually leading to a shareholder lawsuit that cost McKesson nearly $1 billion.
Morningstar analysts said McKesson’s healthcare IT business never fit the firm’s overall strategy and was an impaired asset from the beginning as a result of the accounting fraud.
“Management has not made any material investments within this business over the past several years, and to our understanding, the technology was two to three generations behind other major HCIT players,” they wrote in a note.
New York-based McKesson and Change Healthcare will take steps to launch an initial public offering in the months after the transaction closes. McKesson is expected to exit its investment in the new company.
Last week, Reuters reported talks between the companies, citing people familiar with the matter.
McKesson’s shares rose 2.3% to close at $176.58 on the New York Stock Exchange.
McKesson and Change Healthcare will own about 70% and 30% of the new company, respectively.
The companies will receive cash proceeds of about $1.25 billion and $1.75 billion, respectively, following the close of the transaction, expected in the first half of 2017. Neil de Crescenzo, chief executive of Change Healthcare, will become CEO of the new company.
McKesson also said it was exploring strategic alternatives for its enterprise information solutions business, which provides information to hospitals and also includes a revenue management system.
Barclays advised Change Healthcare.