Talks Break Off on PacifiCare’s Bid to Acquire Maxicare

A bid by PacifiCare Health Systems to expand its health maintenance organization in Southern California by acquiring bankrupt Maxicare Health Systems of Los Angeles ran aground late Tuesday when buyout negotiations broke off.

In separate statements Wednesday, both HMOs said the talks came to an abrupt end and no further discussions are contemplated on PacifiCare’s preliminary offer to buy Maxicare in an all-cash transaction.

Neither company would disclose the details of the PacifiCare offer, which was initiated last Thursday, or what points had become stumbling blocks.

“I think we both met in good faith and just weren’t able to come to an agreement,” said Terry O. Hatshorn, the chief executive and president of PacifiCare. “There was so much disagreement, it wasn’t even close.”

PacifiCare’s stock dropped sharply in over-the-counter trading, but company officials said they did not believe the fall was related to the merger news. Its stock closed at $17.75 a share, down $1.50 from the close of the market on Wednesday.

Hartshorn said PacifiCare made a “compelling” offer to Maxicare and he was disappointed by the outcome. He said the company will “continue to look for expansion opportunities” and is already considering other potential acquisitions. He said PacifiCare would like to expand into Northern California and Arizona.

If consummated, the merger would have increased the membership of PacifiCare by about 50% to 956,000. Maxicare has about 320,000 HMO members. More important, it would have boosted PacifiCare’s already large presence in Southern California.

Industry analysts have said that the merger could mean better health-care delivery to consumers by improving the efficiency and providing greater resources to Maxicare operations. But they also said the reduced competition could mean higher prices.

Maxicare officials initially had said they were surprised and puzzled by the timing of PacifiCare’s move, which came just a few days before Maxicare was scheduled to present a disclosure statement and reorganization plan to a federal bankruptcy court in Santa Ana.

Court approval of these documents is crucial to the company’s goal of emerging from Chapter 11 bankruptcy this summer. The company’s management and creditors stressed that they did not want negotiations with PacifiCare, one of Maxicare’s strongest competitors, to delay the process.

“We are pleased that PacifiCare has indicated its interest in us,” said Peter J. Ratican, Maxicare’s chairman and chief executive, in announcing that the two companies were unable to reach an accord.

“We continue to believe, however, that the interest of Maxicare’s enrollees, health-care providers, creditors, shareholders and employees will be best served through the confirmation of Maxicare’s carefully negotiated, consensual plan of reorganization, which is pending before the U.S. Bankruptcy Court,” he said.

Wayne B. Lowell, PacifiCare’s chief financial officer, said he did not believe the drop in PacifiCare’s stock Wednesday was related to the failed buyout negotiations. He noted that the stock of FHP International Corp., a Fountain Valley-based health maintenance organization, also dropped, despite a report of increased earnings.