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Francisco Partners scoops up bulk of IBM's Watson Health unit

·2 min read

In what has to be considered an anticlimactic ending, IBM sold off the data assets of its Watson Health unit to private equity firm Francisco Partners today. The two firms did not share the purchase price, but previous reports pegged the value at around $1 billion.

Under the terms of the deal Francisco is grabbing various pieces of the unit, including Health Insights, MarketScan, Clinical Development, Social Program Management, Micromedex and imaging software offerings. This gives Francisco Partners a broad range of health data under its umbrella.

When IBM put together Watson Health in 2015, it hoped to dominate the vertical by building the unit around a data-driven strategy. To that end, it began scooping up health data companies starting with Phytel and Explorys .

It went on to spend $1 billion on Merge Healthcare and wrapped up its spending, buying Truven Health Analytics the following year for $2.6 billion. Although the company had high hopes that Watson Health would help drive its artificial intelligence push, the unit failed to produce the results it was hoping for and when Arvind Krishna replaced Ginni Rometty as CEO in 2019, he had different priorities.

Francisco Partners plans to build a new standalone company with these assets, and in a somewhat surprising move, given the division failed to perform as hoped, the firm plans to keep the same management team in place, at least for now.

Justin Chen, principal at Francisco Partners, says that they plan to give the new company additional support to help it fulfill its potential. "Partnering with corporations to execute divisional carve-outs has been a core focus of Francisco Partners. We look forward to supporting the talented employees and management team, helping the standalone company focus on growth opportunities to realize its full potential, and delivering enhanced value to customers and partners," he said in a statement.

IBM is making this sale just as the healthcare vertical is heating up. Last year, Oracle bought health records company Cerner for $28 billion and Microsoft bought Nuance Communications in a deal valued at nearly $20 billion. While both deals are pending regulatory approval, it shows how much large companies value the health vertical.

As a result, it was a move that clearly caught Patrick Moorhead, principal analyst at Moor Insights & Strategy, by surprise. "I am very surprised because the puck is moving to more vertical solutions. I suppose it also shows potentially how poorly the unit was doing."

Regardless, the deal is done, pending regulatory approval, and is expected to close in the second quarter. Given that sensitive health data is involved in this transaction, it's possible that the deal could face additional scrutiny.