Hospital Corp. of America Favored as Suitor : American Hospital Supply Rejects Baxter Offer
With proxy votes from stockholders reportedly running in favor of the planned mega-merger of Hospital Corp. of America and American Hospital Supply, American’s directors have voted to reject a higher, $3.26-billion offer to merge with Baxter Travenol Laboratories.
American Hospital of Evanston, Ill., said in a statement Tuesday that its directors unanimously rejected the Baxter Travenol proposal because of concerns over possible antitrust problems. American’s directors also said they believed that Deerfield, Ill.-based Baxter Travenol could not muster the funds to complete its offer to pay $50 a share for half of American’s 72.6 million shares and an equivalent amount of stock for the rest.
The board’s response to Baxter’s overture, disclosed last Friday, has dealt a severe blow to any hope that Baxter had of bolstering its position in the troubled $20-billion-a-year hospital supply market by buying American--which markets more than 130,000 medical products to hospitals.
Both American and HCA--the nation’s largest for-profit hospital chain with 420 facilities--have postponed by at least a week their original July 3 voting deadline on HCA’s April 1 merger proposal. Under that proposal, American shareholders would receive shares in a new holding company, Kuron Corp., but no cash. The directors’ action effectively bars shareholders from voting on Baxter’s proposal.
“American merger law is uniform on this point,” said John Coffee, a Columbia University law professor who is a specialist in takeover law. “The board has to approve a merger before it can go to the shareholders for their approval.”
Baxter officials issued a statement Tuesday expressing “disappointment” with American’s actions. “We cannot understand why American is acting to deprive its stockholders of our . . . (offer) which represents a substantial premium over American’s pending transaction with HCA,” said Vernon R. Loucks, president and chief executive of Baxter. “Baxter’s acquisition of American would create a strong and independent supply source for all hospitals and health-care providers.”
Indeed, after having reacted negatively to HCA’s merger offer--which would create the nation’s largest health-care company with a market value of $6.6 billion--Wall Street initially reacted favorably to the Baxter plan. On Monday, American’s stock closed at $38.50 a share on the New York Stock Exchange, up $1.50. Baxter’s shares also rose, closing at $16, up 12.5 cents.
As news of the directors’ action reached Wall Street on Tuesday, investors reinstated their negative verdict of the HCA/American merger deal. American’s stock dropped $1.75 to $36.75, and HCA’s declined $1 to $48. Baxter’s was unchanged at $16.
Both Baxter and American have experienced trouble in the hospital supply market, which has been among the first areas hit by the wave of hospital cost-cutting measures.
In 1984, Baxter--a leading manufacturer of intravenous solutions, kidney dialysis equipment and related medical supplies--saw its net income plummet 86.7% to $29.1 million. In the first quarter of 1985, American’s net income fell 16% to $821 million from $855 million during the same period a year earlier.
Yet, throughout the roller-coaster merger ordeal, American has been forced to choose between two proposals, each of which had potentially unpleasant consequences.
American felt pressured to consider Baxter’s proposal because its customers have started defecting to other supply firms out of fear that a company formed by American and HCA would monopolize the hospital supply market. Meanwhile, HCA President Thomas Frist Jr., in a June 24 letter to American directors, had threatened to use his contractual power to veto a merger between Baxter Travenol and American.
Under the terms of HCA’s merger agreement with American, HCA could demand 39 million shares of unissued American stock, or 35% of the company, if American were the subject of an unfriendly takeover by a third party.
The agreement further provides that each share of American stock could be exchanged for three-fourths of a share in a new holding company. Holders of HCA’s 88.1 million outstanding shares would receive a full share in the new company.
Still, analysts have said that American and Baxter represent a more logical combination than American and HCA because Baxter could offer its technical expertise and excess production capacity in exchange for American’s greater marketing prowess and diversified product line.
Eager to Take Profits
But large institutional investors are apparently eager to take their profits now rather than risk a prolonged Justice Department inquiry about possible antitrust problems.
Since mid-April, the agency has been reviewing the proposed combination of American and HCA, but a deal with Baxter could draw even closer scrutiny because those two companies compete directly in the market of intravenous feeding equipment.
Baxter Travenol officials said they are continuing to review the situation with American Hospital and plan to issue an announcement today.
