Deal of the Year: Francisco Partners carves out Capsule with surgical precision

By Aaron Weitzman, Buyouts Insider

Scalpel! Francisco’s carve-out of Capsule Technologies, which provides patient monitoring and medical device integration, was just what the doctor ordered.

Francisco Partners’ exit of Capsule Technologies was a strong financial success for the firm, but the investment sticks in the mind of deal team leader Chris Adams for a reason beyond financial performance.

Capsule, which provides patient monitoring and medical device integration at health facilities, had to pivot during the pandemic to operate remotely. The company, which Francisco acquired in 2019, also quickly transitioned to developing its technology to help medical professionals remotely monitor covid patients on ventilators without having to make close contact.

“We gave that technology away in the early days of covid to help during those tough times. How quickly the team was able to do this and how impactful it was to many clinicians and patients is definitely one of the parts of the story of which I am most proud,” says Adams, who worked on the deal with Justin Chen (principal) and Alarisse Lam (associate).

Francisco sold Capsule last year to Royal Philips for $635 million, generating a 233 percent gross IRR and fetched roughly a 11.9x gross MOIC, according to sources familiar with the deal. Francisco’s exit of Capsule won Buyouts’ overall Deal of the Year, as well as Mid-Market Deal of the Year.

Carve-outs and orphans

The firm managed to take Capsule, which was a corporate orphan under the ownership of Qualcomm, carve it out, and turn it into an independent company. Francisco is no stranger to carve-outs, having done so with Quest Software from Dell Software Group. The firm eventually bought Dell Software Group (Quest Software and SonicWall) for $2.4 billion and sold it for a whopping $5.4 billion, netting a 6.8x gross MOIC in the process.

“We gave that technology away in the early days of covid to help during those tough times. How quickly the team was able to do this and how impactful it was to many clinicians and patients is definitely one of the parts of the story of which I am most proud” Chris Adams, Francisco Partners

“A lot of what we were able to do with the business would have been hard for Qualcomm to do,” Adams says. “We divested two parts of the business, made an acquisition, brought in a CEO, all in the first six months.

“At FP, we specialize in tech and divisional carve-outs, and in doing so we try to get to know companies’ way before there is an opportunity to invest,” Adams says. “Lots of our best investments were ones where we had many years of history before investing and Quest and Capsule were no different.”

Francisco Partners became interested in Capsule in 2011 when it was a founder-owned business. It came close to buying the company, but ultimately did not move forward. The firm then got outbid by Qualcomm in 2015. But after a few years under Qualcomm’s ownership, Capsule fell down the priority list and became non-core within the larger organization.

Francisco gets its chance

Francisco finally got its chance with Capsule in 2019. “We have often been successful when we acquire divisions that are orphaned by a larger company and become non-core after the bigger entity changes its strategy and thought process, and this leads to opportunities for carve-outs to refocus the strategy and build a business as an independent entity,” says Adams.

Francisco had a different vision for Capsule than Qualcomm, which was pushing the strategy to focus more on hospital communications with patients at home. Instead, Francisco refocused the strategy back to patients at the hospital, which it saw as Capsule’s strength.

Francisco executed much of its plan in the first six months after the carve-out. It focused on three major areas: team and organization; refocusing the business back on the hospital; and bringing it back into financial stability.

The firm brought in new CEO Hemant Goel, who previously served as the president of Spok, a provider of communication technology to healthcare and other industries. Prior to joining Spok, Goel was vice-president, Clinical Solutions at Siemens Health Services, where he held worldwide development responsibilities for the IT solutions business.

“We were roughly a year into our investment when covid hit and just like everyone else, we had to figure out how to continue operating remotely, move to virtual and operate in a new normal,” Chris Adams,

Francisco Partners

At the time, Adams said that Goel brought operating experience, deep market knowledge, customer relationships, product, strategy and technical expertise to the role at Capsule. Francisco brought in several other executives but also retained a number of key people.

Francisco divested the remote patient monitoring part of T-E business, refocusing Capsule’s strategy on hospitals.

“This way, Capsule could be the central source of truth and have more of a focused data strategy, so we made a strategic acquisition of Bernoulli that helped us build out the data strategy part of the business,” says Adams.

Francisco also added on Bernoulli Health shortly after its acquisition. Bernoulli provides real-time clinical monitoring, giving care teams at health facilities information about a patient’s condition that can lead to early intervention and increase patient safety.

Part of Francisco’s challenge with Capsule was all the moving parts of executing the plan in the first six months.

“Just a lot of execution and it all went broadly well but we had to put out a lot of little fires through the whole process and all the moving parts,” Adams says.

The firm also faced the challenges of the pandemic, which shut down businesses and most in-person interactions for a period of months.

“We were roughly a year into our investment when covid hit and just like everyone else, we had to figure out how to continue operating remotely, move to virtual and operate in a new normal,” he says.

Talks of exiting came much earlier than Francisco expected, after holding it for two years.

“We got to that decision based on the step-function changes in value creation,” Adams says. “As we looked ahead, a lot of what we saw was a really nice business with a nice position but really where the value creation was going to be more of a steady state as opposed to enormous step-function changes.”

This is a business that has garnered a lot of attention in recent years. “It was in that place in the ecosystem where there are not all that many market leaders that you can buy that are clean and well run,” he says. “As the strategics saw how well Capsule was doing, it generated a lot of inbound interest.”

Francisco Partners: The Winning Numbers

233%
Gross IRR for Francisco on its carve-out of Capsule from Qualcomm, according to sources

11.9x
Francisco’s gross MOIC on the deal

$635m
Price paid by Royal Philips for Capsule last year