Foundation Health Withdraws HMO Offer : Mergers: Its former target, Health Systems, retreats from earlier statements and says it is considering suitors.


Foundation Health Corp. said Monday that it has withdrawn its $1.55-billion stock offer to buy Health Systems International Inc., bowing out of a two-way competition that emerged last month to acquire the giant Woodland Hills-based health maintenance organization.

Health Systems, which insisted last month that it was not for sale, retreated from that statement and said other potential suitors have surfaced. Health Systems is the corporate parent of Health Net, which has 1.25 million members and is the second-largest HMO in California.

“We are interested in the right kind of strategic partnership,” said Don Prial, a spokesman at Health Systems, who added that the company has received several acquisition inquiries from other managed-care companies.

“Other competitors are deciding that they might want to take a look at us too,” Prial said. “But it’s strictly informal now.”


Foundation Health, which has 572,000 HMO members and is based in Rancho Cordova, rescinded the offer it made Dec. 13 to pay a 40% premium above Health Systems’ share price on that date, or about $31.15 a share.

“Following preliminary discussions, we have elected not to proceed,” Daniel Crowley, chief executive of Foundation, said in a statement. “Our management team continues to create ample opportunities for growth.”

In removing its bid, Foundation yielded to FHP International, a Fountain Valley-based HMO that submitted a Dec. 12 offer to purchase Health Systems for $34 a share, or a total of about $1.69 billion in stock. FHP said it has not withdrawn or altered its offer, which is being considered by a special board committee Health Systems established last month.

The combination of FHP and Health Systems would create the nation’s largest publicly traded managed-care company, with as much as $6 billion in annual revenue and at least 3.1 million members. It would also lead to reduced costs and enhanced marketplace clout, analysts say.


Larger managed-care companies control the health care choices of more patients and are therefore better able to negotiate discounts with doctors, hospitals and other providers, said Randall Huyser, an analyst at Furman Selz Inc. in San Francisco.

Shares of Health Systems, which was formed early last year by the merger of Health Net and a Colorado-based HMO, closed Monday at $29.75, down $3.375, on the New York Stock Exchange. FHP closed at $25, up 25 cents, on the NYSE, and Foundation shares closed at $30.125, up 75 cents, on Nasdaq.