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* Quality Systems, Nuance seen as attractive targets
* GE, Siemens among possible buyers
* M&A to rev up even before funding is made available
BANGALORE, July 15 (Reuters) - As the Obama administration pushes doctors and hospitals to adopt electronic medical records systems, the healthcare IT sector is headed for consolidation to better compete for these contracts.
Hospitals and physicians moving to digitized records are eligible to receive a slice of some $27 billion in federal funding, an incentive meant to cut medical errors and costs as well as to more easily access and monitor patient health.
The healthcare IT industry, currently split between firms that cater to hospitals and those focusing on physicians, is set to see deals that would create integrated e-records providers -- which would also be welcomed by hospitals that prefer to work with a single IT vendor.
"The (industry) fragmentation calls for consolidation in the sector... we will see the deals typically happening towards the lower end of the market in the $1 billion to $2 billion range," Auriga USA analyst Gene Mannheimer said.
In June, Allscripts said it will buy rival Eclipsys Corp ECLP.O for $1.3 billion, combining its physician offices and post-acute care segment with Eclipsys' hospital IT business.
The most likely target -- Quality Systems Inc (QSII.O) -- is expected to see interest from bigger rivals within the health IT space and companies like General Electric Co (GE.N) and Siemens (SIEGn.DE), which also offer these services.
Other players digitizing records at physician practices include Allscripts-Misys Healthcare Solutions Inc (MDRX.O) and privately held Epic Systems Corp, while Omnicell Inc (OMCL.O), McKesson Corp (MCK.N) and Computer Programs and Systems Inc (CPSI.O) are the publicly listed hospital IT providers.
"I would say that if these transactions are going to happen -- then the sooner the better, because you want to be able to go out to your customer with a single offering as soon as possible," Morgan Keegan analyst Jamie Stockton said.
One of the largest players Cerner (CERN.O), which has both physician IT and hospital IT products, is likely to stay out of the consolidation game as it has always developed its business internally.
And cross-sector takeovers by traditional IT services giants like International Business Machine Corp (IBM.N), Dell Inc DELL.O and Oracle Corp ORCL.O, as some have speculated, also appear unlikely.
"I think the bigger players are more concentrated on less regulated markets (than healthcare)," Chicago Capital Management founder Steve Gerbel, who specializes in merger arbitrage situations, said.
"I see Quality Systems as an attractive takeover target... but I don't see a merger before next year," Christopher Sassouni, a fund manager with Eagle Asset Management, told Reuters.
Sassouni, whose fund held a 2.15 percent stake in Quality Systems as of March 31, sees the company getting a premium of 20 percent to 30 percent on its stock, which is already trading up 11 percent over the trailing 12 months.
"(Quality Systems) has a partnership with Siemens, and there are speculations whether at some point of time Siemens will decide to merge with Quality Systems or not," Sassouni said.
Healthcare IT may also show interest in makers of products that could feed into their services -- like voice recognition software provider Nuance Communications Inc (NUAN.O), which gets about 44 percent of its revenue from healthcare.
Morgan Keegan's Stockton sees more utilization of voice recognition software in healthcare as it allows notes to be dictated directly into electronic health records systems (EHR).
Deals could also arise from companies like pharmaceutical wholesaler McKesson -- which recently had a management change -- hiving off their healthcare IT businesses.
"My idea is (McKesson) might spin off their healthcare IT business, because as a stand alone company, that will give much more value to the shareholders. Its two businesses -- distribution and healthcare IT -- are really not connected," Eagle Asset's Sassouni said. (Reporting by Esha Dey and Krishnakali Sengupta in Bangalore; Editing by Anne Pallivathuckal)