TSCC Technology Solutions Company (CE)

McKesson Corp. is weighing a separation of its information-technology unit as the health-care giant grapples with pricing pressure in its core drug-distribution business, people familiar with the matter said.

McKesson, which has a market capitalization of more than $40 billion, is considering options for the business that could include a sale or a merger, the people said. It is not clear whether any deal would be for the entire business and there may not be one at all.

The business, known as Technology Solutions, provides software, services and consulting to hospitals, doctors' offices and others, and helps customers reduce costs and errors, McKesson's website says. It had $2.9 billion in sales in the fiscal year that ended in March, and operating profit of $519 million. The unit is dwarfed in size by McKesson's drug-distribution business, which had $188 billion of sales in the fiscal year and operating profit of $3.6 billion, though its margins are much higher.

Based on typical industry multiples, the technology business could be worth more than $5 billion including any debt.

McKesson has already pared the unit in recent years, chipping away at revenue but also boosting its profit margins. Chief Financial Officer James Beer told analysts last year that McKesson is "prepared to re-look at the portfolio on a continuing basis to figure out what fits and what doesn't fit."

Companies often consider separations of units whose profit margins, expected trading multiples or strategies differ dramatically from those of core businesses. It has been happening more as shareholder activists and other investors push companies to narrow their focus.

Spinoff activity peaked among U.S. companies in 2014, with a record 58 transactions worth $164 billion, according to FactSet. They have fallen off a bit since then, though in the past year several big companies have pursued such moves, including Hewlett-Packard Co., Baxter International Inc. and Xerox Corp.

McKesson has announced cost cuts and layoffs as it grapples with price pressures brought on by consolidation among its customers.

A full separation of the IT unit would largely unwind an ill-fated prior deal. In 1999, McKesson bought health-care software firm HBO & Co. in a bid to infuse technology into its more mundane role as a middleman between drug companies and the hospitals and pharmacies that dispense drugs.

But after it was completed, auditors found evidence that HBO executives had fraudulently booked revenue and inflated the Georgia company's profits. Several HBO officials were indicted on federal charges, and its chairman was eventually sentenced to 10 years in prison. McKesson shares didn't recover to their pre-scandal levels for more than a decade.

They rose sharply in the early 2010s, peaking above $240 a share last May, but are down 20% over the past year.

Write to Liz Hoffman at liz.hoffman@wsj.com, Dana Cimilluca at dana.cimilluca@wsj.com and Dana Mattioli at dana.mattioli@wsj.com

(END) Dow Jones Newswires

June 03, 2016 08:25 ET (12:25 GMT)

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